UK
Wanted: someone to stick up for bonuses
22 September 2008
After the fury, the recriminations. Blaming bonuses for the trauma of the past 13 months is nothing new, but the finger pointing is reaching new levels of vigour.
Gordon Brown and Alistair Darling have let it be known that they will regale the Labour Party Conference with speeches calling for more regulation of the financial system and for “tighter control of irresponsible City bonuses”.
Labour deputy leader Harriet Harman has set the pace. Last week she described bonuses as outrageous, blamed them for “mad house prices” in London (which may not be unreasonable given that Savills estimates that £5.5bn of last year’s estimated £8.5bn bonus pot went into the capital’s housing market) and said they were structured so as to encourage traders to take “unwarranted risks”.
Not to be outdone, the FSA is apparently said to be planning spot checks on banks’ risk systems. The penalty for non-conformity? Revision of the way rewards are calculated.
But before dumping bonuses into the dustbin of history, it’s worth considering whether doing away with them would really make a difference. Most models of bonus reform look at deferring bonuses over time and aligning them with the risks inherent in their achievement.
Arguably, this is precisely what both Lehman and Bear Stearns were up to – both paid a high proportion of bonuses in deferred stock, meaning bonuses were aligned to the wellbeing of the firms as a whole. And employees at both saw the value of the last few years’ bonuses wiped out as the stock plummeted.
Bonuses have also done some good. £8.5bn pumped into the Exchequer and the economy is no bad thing. Without it, charities are already said to be bracing themselves for a lack of cash.
Does someone need to stand up for bonuses? Or is Gordon Brown right to bash them into oblivion. We invite you to comment below.
Without bonuses you would not have had the incredible success of the banking sector over the previous decade, nor the renewed vibrancy of the City of London, nor high levels of UK GDP growth. Shooting them down is sheer populist nonsense.
Harris 2 22 Sep 2008
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