I wrote the other day about my suspicions that part of the problem for the economic mess we're in is a result of shareholders not taking a sufficiently keen interest in the governance of the companies they own.
One of the problems is bankers bonuses, a topic that has just reared its ugly head again.
Now, in this case, there is absolutely no excuse for shareholders in some of our banks not taking an interest. I refer specifically to the Lloyds Banking Group, RBS, Northern Rock, and Bradford & Bingley.
What do all those banks have in common? They all had to be rescued by the taxpayer during the financial crisis, and now the British government is a major shareholder, and indeed a majority shareholder in all but Lloyds Banking Group.
The government tells us they don't approve of excessive bonuses. And yet they seem quite content to let the banks pay billions of pounds of what is now taxpayers' money to some highly paid individuals within the banks.
Why are they doing that?
The bankers would have us believe that it is necessary to pay enormous salaries and bonuses to attract talented people. That argument is very hard to believe. For one thing, exactly how talented are these people? They managed to screw things up on a scale seldom seen.
For another thing, what is the evidence that banks would not be able to recruit competent staff if they paid much smaller salaries? I dare say some of the things bankers do is quite tricky. Nursing is also quite tricky. Plenty of people are willing to be nurses despite being paid about as much per year as some bankers get paid per week.
A typical post-doctoral research scientist does an incredibly difficult job, requiring skills that very few people have, and typically is paid less than £30K (that's per year, not per week just in case anyone is still thinking in terms of bankers' salaries).
Although pay is an important motivator, it is certainly not the only thing that motivates people. Even in the absence of these huge bonuses, it is unlikely many bankers would be poorly paid. A good employer should be able to attract good staff without needing to pay stratospheric bonuses. In a properly functioning free market, bankers' pay would reach a level which is high enough to ensure that suitably qualified people are willing to do the job, but no higher.
In other words, a rational employer would not pay stratospheric bonuses if they didn't need to.
It seems to me that bankers pay themselves huge bonuses for one simple reason: because they can.
Shareholders should not allow this. It is understandable that they do for companies owned by institutional shareholders, as I wrote the other day.
But when the government owns the companies, it is much harder to understand why they are complicit in this injustice.
The bankers were a major force in the complete rogering of the economy that has caused so much pain for so many over the last couple of years. They are being rewarded for that with billions of pounds of our money.
Seriously, why are we not rioting in the streets about this?
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Hi Adam,
I think one explanation is that not everyone in the banks is losing money, many traders are making huge profits for their employer. Is it their fault if someone else in the bank has lost a ton of money, putting the overall group into loss? If you were that trader, wouldn't you feel miffed if you were told that you couldn't share a slice of that profit, it all had to go to the shareholders?
What's to stop him saying "OK, fine. I hear banks in America, Japan, Switzerland, etc are hiring. Let's see what deal they will offer." Since the trader could make just as much money for them, why wouldn't they snap him up? If the profitable traders all walk, the bank is left with just the losses and no obvious way to pay them.
I don't see how that's in the shareholders' interest!
Overall, I think the problem is the way banks and their traders are able to effectively make one-way bets: heads I win, tails you lose. But that's a much bigger problem than bankers' bonuses since it would still exist even if all the profits went to the shareholders, and it's a very difficult one to solve. Here's a long but very interesting analysis of that problem, and related concerns about the huge dominance of financial services in our economy:
http://www.macroresilience.com/2009/11/06/a-rational-explanation-of-the-financial-crisis/
Neil
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The argument about talented traders leaving and going elsewhere if they don't get huge bonuses is one that's often repeated by the banks.
There is an assumption behind that argument that there is a limited pool of highly talented people who are the only ones capable of trading in such a way that the banks are nicely profitable, and that if the bank loses a talented trader, then they can't just recruit another one.
I'm not sure I believe that assumption. How difficult can it be? Is it really a job that only a very few elite people, the financial equivalent of athletes who can run the 100 m in less than 10 s, can do well? Or is it something that any reasonably bright graduate from a numerate discipline (maths, economics, statistics, physics etc) could do with a bit of training? There are many such graduates around working in professions much less highly paid than banking, and I'm sure the banks could recruit plenty of them who would be absolutely delighted to work for 6 figure salaries, even without the 7 figure bonuses, if they wanted to.
Until someone shows me compelling evidence to support the theory that only a small number of elite people can do the job, I'm not very inclined to believe it.
Of course your point about different bits of banks performing differently is valid. That suggests some failings at senior management level. Why are they allowing bits of their banks to do so badly?