With the financial services sector only just recovering from a near cataclysmic failure, the industry seems hell bent on alienating itself from the general public by going back to the high profile bonus payments that many say encouraged the type of behaviour that led to failure.
The herd like nature of the banking sector means that pay and remuneration packages for the few capital markets traders have not been universally revised downwards to what many would consider to be a sensible and realistic level. And it is only a few bankers that attract the high levels of bonus payments – the vast majority of bank employees receive either no bonus payments or ones that would equate to more normal and generally expected levels of payments for outstanding performance.
So after vast amounts of public funds were used to bail out the banks it seems that even governments are unable to stop bankers continuing to pay high level bonuses to the few traders in the capital and derivatives markets. With many financial institutions now effectively owned by governments it should be possible to cap the bonus payments that can be earned at least for a while until tax payer money has been repaid.
But there is the rub. Not all financial institutions were bailed out, although they benefited from the general state support infrastructure that was put in place to stave off total collapse. Equally, not all countries were equally badly affected and so getting a common global agreement on bankers pay and bonuses is almost impossible. Therefore, to attract the very best staff banks are having to replicate the types of packages that were available before the collapse to match competitive offers elsewhere.
But should we worry? Despite the personal angst that many feel that the very people who arguably brought about the failure in the system should now be rewarded as before, there are benefits to getting these people motivated to make big money. Bonuses are only paid if performance goals are met – and these are now being structured to more reflect longer term goals rather than short term results. Equally, bonuses are increasingly being paid in stock rather than cash so that recipients have a vested interest in creating shareholder value rather than just cashing in on high risk short term results.
The banks need to make money and be profitable if they are to repay the state for the funding that was injected. Making money from traditional high street banking and lending products is possible but it is the deals carried out in the capital markets where megaprofits can be made (or lost!). Therefore, getting the right trading environment with appropriate checks and balances should mean that the banks make lots of profits sooner and are able to repay the taxpayer what they are owed.
Equally, the new 50% personal tax rates and increased NI contributions will mean that the Treasury benefits from any bonus payments made. And tax revenue is scarce so the more successful these bankers are, the better our public finances can be in the short term.
So it may be morally wrong for these bankers to be rewarded with large bonuses but in a perverse way we will benefit in general from their performance. Higher tax payments will benefit the central coffers and mitigate some of our long term public finance challenges. With the UK economy so dependent upon financial services, we cannot afford to let London be relegated to a bit player through over regulation or stringent rules where other countries do not comply.
Unless and until we can get all financial institutions to revise their remuneration packages for these relatively few people then there is little hope that the culture of high bonuses will change. Whilst one company or country feels that they can gain a competitive advantage by attracting staff through these schemes then others will have to match them to ensure they retain or attract high calibre performers.
In reality, if these jobs were easy then many more of us would like to get the level of rewards on offer. The very fact that the number is so few means that it is a specialised cut throat and high pressure environment in which the vast majority would fail to survive.
The key challenge for regulators is to ensure that the activities of these traders is much more tightly defined and transparent than before with all the risks clearly defined and monitored. Equally, there needs to be a robust capital adequacy requirement implemented to ensure that there are reserves in place to compensate for losses without the need for state intervention. Not an easy task in a free market economy!