The perks of bonuses (16 February 2009)
Attacking bonuses earned by bankers is counterproductive: they need and deserve incentives to save the UK economy
Bonuses are supposed to be paid on the basis of the performance of the company (or in this instance, bank) and the employee in the previous year. This simple fact seems to escape the attention of a lot of people who talk about City pay. I know a little bit about it because, to coin a phrase, some of my best friends are bankers; take this declaration of interest into account by all means, but do not dismiss the argument for that reason.
Bonuses are convenient for employers because they do not create open-ended commitments or affect other payments such as, for instance, redundancy. Banks employ many people who are neither tellers at branches nor the executives who made all the errors, but whose trading and sales expertise can make a large difference to the fortunes of the institution. For most of these people, bonuses were neither windfalls nor tips, but actually served their purpose as incentives to work hard. Any fool can make money in a rising market, but it takes skill and commitment to make money when the going gets tough, and over-performing in a bad market is probably one of the most bonus-worthy achievements there is.
The semi-nationalised Lloyds Banking Group, created in January 2009 from Lloyds TSB and Halifax Bank of Scotland (HBOS) is in a particularly strange position. Shortly after the merger was announced, samizdat images started circulating around the City. Howard, star of Halifax’s television commercials, was depicted doing something unmentionable to the black horse of Lloyds. Lloyds is the one institution that did not fail itself but been dragged down by helping the whole sector, and the government, out of a tight spot by taking over HBOS, Lloyds TSB generated about £1.3bn in profits in 2008, compared to losses of £8.4bn at HBOS.
David Cameron declares that Lloyds staff should be restricted to a figure, £2,000 (which, after 41% ends up with the exchequer, amounts to £1,180), which he has plucked from the air. Cameron can probably afford to tip the waiter £2,000 after dinner, thanks to his inherited family wealth, estimated by the Sunday Times Rich List at over £30m. It seems perverse that regardless of individual performance, City workers should have their pay dictated by a preposterous political auction about who can be harshest to the wicked bankers. Meanwhile, taxation of inherited wealth appears to be on the way out.
I would not mind so much if this were a shift from market capitalism to egalitarian socialism – but this is more like a regression to feudalism. Politicians of all parties boasted for years until 2008 about the financial sector, and often led the calls for further deregulation, and now cover their own errors by lambasting the banks. Things went too far with excessive and guaranteed bonuses, but the tone of public discussion about the City has now become indiscriminate and nasty. If and when the bits are put back together we shall still need the City and its employees to put their skills to generating, rather than dissipating, earnings for Britain.