How to Solve the Banking Bonus Problem – Easily

Banking bonuses were back in the headlines this last week-end. The Sunday Times Business Section had the banner headline, “Bonus Storm as losses hit £7bn at RBS.” According to the report it appears that the Treasury – representing taxpayers who currently have an 84% in the bank that they bailed out in 2008 – is expected to approve a bonus pool of £1.3 billion for 2009, despite the fact that the bank has forecast losses of £7 billion for the year.

Sounds appalling, doesn’t it? Perhaps, even more appalling (and certainly more galling) is the line in the report that, “The return of bonuses across the City in recent months … has heaped pressure on RBS to make big payouts to its investment bankers to stop them being poached by rivals.” This makes it appear that the whole “bonus culture” is ultimately nothing more than an excessive example of “keeping up with the Joneses.” It certainly works with the headline to give the appearance that the bonuses bear no correlation to the business results.

Yet, as ever, all is not quite what it seems. The text of the article also reveals that:-

• The loss is the result of “a £14 billion hit” on bad debts, which “once exceptional items are taken into account, should be cut to $5 billion.”
• The investment banking arm “is on track to make billons of pounds in profits.”

The net effect of this is to imply that the bonuses are actually justified. After all, investment banking is ‘doing well’ while the rest of operations would also be okay but for the unfortunate “hit” of the bad loans, the bulk of which are in any case “exceptional.” Certainly this seems to run counter to the secondary headline about Treasury approving payouts “despite bad debts driving state bank into red.” (My emphasis.) This sense is reinforced by the statement that bonuses will be “the minimum we can get away with” as well as the fact that “RBS is expected to pay 30% of its investment banking revenues to staff, compared with 36% at Goldman Sachs and 50% at many other banks.” (Again my emphasis.)

So what are you meant to conclude from this? You could perhaps argue that it is balanced reporting that simply presents the facts and leaves you to reach your own conclusion. That, however, does not fit with the headline which conveys a strong sense of disapproval. If that is the intention, then one can only say that the article is disappointing, as it clearly pulls its punches.

Maybe this is simply through the tacit belief that people who are performing well should not be penalised because others are not – or at least another part of the business is not. Yet, apart from challenging why bonuses should be awarded against revenue in the first place, the obvious question that follows is, “Why then are two businesses treated as one.” If investment banking and retail banking together make up RBS then bonuses have to be paid on RBS results. Don’t they?

If, as some say, the banking crisis was caused by excessive risks taken by investment banking there is no way that the investment banking fraternity should not contribute more significantly to the price of the recovery. If they did not and they are entitled to these disproportionate rewards, then they cannot be penalised by being treated as part of the same organisational entity.

Either way the solution is simple and obvious: separate investment and retail banking. Governments need to prohibit the combination of such services. This would make each more accountable. It would also open the activities of investment banks to greater public scrutiny and allow more reasonable assessment of the value of their services and the remuneration of their employees.

This blog is one of several that I write, but is not regular and I only post to it when current events prompt me to make a comment and invite yours. I do hope you will contribute to the discussion and thus help to initiate and bring about the change that is so badly needed. Please click on the link on the top right of your screen to subscribe to a feed. My primary blog is my business one at Zealise but you can also connect to me at Facebook or Twitter