Britain: Should bankers receive annual bonuses?

They are contractual, and London is the global bonus capital, but should they be prohibited or capped? And how would that effect the UK?

One of the first to be involved in the '#OccupyLSX' protest, "Supporter" Spyro, told The Huffington Post "We have seen more than $800 billion used to bail out banks, and at the same time, we have seen the same people responsible for this crisis going home with enormous bonuses.”

He's not wrong. The London Evening Standard reported on 7 January "George Osborne was accused of a surrender over banking bonuses today as it emerged that a staggering £7 billion is set to be paid out this year. City insiders say banks are ready to snub the coalition's appeal for payment restraint as the new bonus season gets under way."

The New Year is traditionally the time when these annual bonuses are calculated and paid out, depending on the institution, between the end of January and March. They are contractual, as bankers have agreed to work for that employer on the basis of the quality its reputation and its bonusing arrangements.

Headhunters love them, of course, because their fees - although capped by their investment banking clients - are based on a percentage of total guaranteed compensation. When a bank seeks to hire executive-level talent it offers one- or even two-year guaranteed bonuses to offset the loss by the appointee of the anticipated bonus from the previous employer.

And the investment banks themselves love them, for such comp. packages enable them to compete in what is inevitably a global recruitment marketplace. By paying bumper bonuses they're able to attract productive and ambitious people not only from London-based competitors, but also from New York, Hong Kong, Tokyo, Sydney, Singapore, Paris, Zurich, Milan, Madrid, Sao Paolo or Frankfurt. And they have been successful in that since 'Big Bang' deregulated London's financial district in 1986. 

Before Big Bang bonuses were small, if ever paid. The stockbroking, stockjobbing, merchant banking and discount houses of that time attracted employees for life. Or for long stays, anyway. Moving from one firm to another was rare and deemed disloyal. Many stock exchange firms were partnerships. People rose through the ranks to reach partner-level, where the firm's liabilities and risks were the shared responsibility of the board and casino banking was unheard of. I recall being taken around the quiet refitted dealing room of a prestgious discount house by a senior director who proudly described the design as resembling the look and ambience of a St James's club billiard room. Employee bonuses were discretionary and related to personal performance and company profitability.

In those days, the Stock Exchange was physically a place where people went to work. Now it's a market stretching across London from the City to Canary Wharf and pursued in dozens of football-sized open-plan office spaces, filled with row-upon-row of dealing desks with computer screens. If #OccupyLSX suspect that Paternoster Square houses "bankers" they are sorely mistaken. Paternoster Square, beside St Paul's Cathedral, is the new home of the exchange alright, but that building accommodates the London Stock Exchange Group's corporate headquarters.

Bonuses are not the only carrot on offer to bankers. Share option schemes deliver profitable gains too. Compensation packages paid to modern employees are complex and could involve numerous tax avoidance mechanisms. Since Non-Doms (people taxed offshore on UK income) have been taxed as if there were UK domiciled, some of these loopholes have been shut-down. But others?

In 1986 London's status as a financial centre, while probably unrivalled in Europe, was miniscule by comparison to New York. However, within ten years, it had grown to compete directly with Wall Street. (Most of the Wall Street bankers had by then moved to Midtown Manhatten, and the term Wall Street had become something of a misnomer, incidentally.) London's rise as a formidable global financial force had two effects: 
  • first, the proportion of British people employed by London-based institutions dropped significantly, as Italians from Milan, Danes from Copenhagen, Americans from New York, or Japanese from Tokyo and talent from every major city, shot across to London to benefit from the vibe and the bonuses.
  • secondly, as fast as factories had closed in the capital, so banks and the myriad of support industries like accounting firms, advertisers, public relations consultants, lawyers, recruiters, office suppliers, technology firms and so on, rented office space and produced profit. So much GDP was being generated from the Square Mile in the City, then in Canary Wharf, but also Midtown at Holborn and even the West End around Oxford Circus, that London accounted for a disproportionate percentage of the nation's wealth. Right across the UK, manufacturing slipped into decline. That didn't appear to matter much as financial services picked up the slack. The UK grew, and bankers reaped the benefits through bonuses. 
No-one in government cared much, as successive administrations courted the bankers and placated their concerns. The Bank of England's regulatory responsibility (and tight controls) were awarded to a new body, the Financial Services Authority (FSA). And eyes appear to have not always to have been firmly fixed on the ball.  As the old men at the top of Barings discovered when Nick Leeson ran up those famed losses in Singapore, derivatives markets are strange and convoluted things, best left to experts they thought. Not. 

Yet as casino banking exploded as fast as the credit derivative, structured finance and asset-backed securities markets grew, the inevitable happened and the credit crunch led to the Great Recession. Suddenly banks shed staff, and bankers' reputations were toast. The most vulnerable banks were bailed out by the government in the most expensive rescue in history. Taxpayers paid through the nose.

The worst about bonusing is the way it is calculated. Bankers are rewarded according to immediate production, not the ultimate profitability of a transaction. The incentive therefore is to rack up as many deals as possible, without concern for how those contracts result over time. Many turn sour, but bonuses have already been paid out by then. If a trader is immediately seemingly profitable, or a salesperson productive, he or she is rewarded via a percentage of that deal. If a trader's activity results in annual losses he doesn't have to repay past bonuses. 

The effects are painstakingly obvious and inevitable. Press indignation, public disquiet, and now street protests, can only be assuaged by fundemental changes to the regulatory system, the remuneration structures of financial institutions, and to the taxation regime.

To alter those things takes the guts of Hercules and the brains of Britain. Whether this Coalition has either the stomach for that fight or the intellect to devise strategies with positive outcomes remains to be seen. The government, Vince Cable - bank-sceptic Business Secretary - included, will not want to instigate a flight of capital, talent and profit from London. Yet are contractual investment bank bonuses really justified or necessary? Very possibly not.

Another catastrophe has been the way in which British university education has veered towards subjects enabling graduates to snap-up post-university traineeships at investment banks, rather than manufacturing companies. Engineering has long been regarded as a second-rate degree, as mathematical, business or statistical degrees rose in popularity. 

Manufacturing suffered hugely from all of this. As the government pursues a policy of engagement with emerging nations like Brazil and the diversification of the UK economy to broaden the offering and raise GDP, the knock-on effects of bank bonusing should be in the forefront of ministerial minds.

#OccupyLSX might protest day-after-day, but it is the government which has to listen to the grievances of ordinary citizens and put in place policies to address them. It's no good letting the status quo reign when the people outside the gleaming entrance halls of plush bank buildings languish without work.

Doing nothing is unacceptable and won't wash. Is the Coalition capable of devising strategies, managing change and delivering positive results which don't knock the stuffing out of London, and yet effectively contain the investment bankers' insatiable greed and lack of social conscience?

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