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It is quite easy to argue that one of the main reasons we have a banking disaster on our hands is that shareholders decided to give bankers bonuses based on their performance.
These worked not wisely, but too well. Bankers abandoned traditional lending, which they understood but which was rather dull and low growth, and went off to find excitement and seductively richer rewards in the fast-moving fleshpots and casinos of the financial markets.
Unfortunately, as can happen with people new to gambling, they won with their first few bets and got a taste for it, thinking it was skill not luck. Though they made money for a while, they understood too little of what they got into. Now we have to live with the predictably disastrous results.
But, paradoxically, though performance pay got us into this mess we may need more performance pay to get us out of it. It is a feature of the big British banks that they do not have a great deal of quality management in depth - the fate of the banks day to day depends very heavily on, in some cases, as few as 15 to 20 key individuals.
And as the banks' share prices plunge to levels not seen in a decade or more, most of the share-based incentive schemes that form the core of the reward packages for these executives have also dived into the red. Most are so far under water that there is little prospect of them paying out any money for years. Just looking at them is demoralising. It is tempting to think a return to penury is no more than these people deserve, but that is not really the point - any more than sacking sir stuart Rose would solve the problems faced by Marks & spencer, however much or little he bears responsibility for its current problems. This is not the time for mindless acts of revenge by disgruntled shareholders; it is a time for pragmatism. The fact is that the banks need their experienced management now more than ever, and they need to hold on to them and remotivate them. Currently they are doing the opposite because a bonus scheme that is under water incentivises people only to be disloyal. It spurs them to leave so that another employer can start them afresh with an incentive scheme priced to take account of current conditions.
Banks need all the grey heads and experience they can muster at the moment. Bad though the current situation is, their departures would make things significantly worse. As the credit squeeze bites, businesses begin to default and private-equity loans turn sour, they need the people who did the deals to be around to sort them out. If they have been allowed to leave, the losses will be even greater. This gives shareholders an uncomfortable choice. Emotionally, they could be forgiven for leaving management to suffer. Rationally, however, they should act to lock in all the experienced management for the three years it might take for this storm to pass. That will mean redesigning or rebasing incentive schemes to take account of the new reality. The fact that some of these rewards will go to people who contributed mightily to the disaster in the first place is something they will have to put up with if they want to see the banks claw their way back in what, for them, will be a very much tougher and low-growth world.
The right stuff for accounts
When I started in this business 40 years ago, the report and accounts of a major company would run to about 24 pages. There would be a chairman's report, which would give an overview and finish with a forecast for the year ahead; a chief executive's report that covered the nuts and bolts and any new and exciting products the company had in the pipeline; and a directors' report that dealt with statutory information. Then you would get into the numbers.
As a young journalist with five minutes to take a view, you were trained to look for the forecast, check the pay, the political contributions and that there was no auditors' qualification and go for it. The system worked. People used the document - in contrast to today when reports are 10 times as long, contain perhaps 20 times as much information and nobody reads them.
Accountants are not as dumb as they sometimes appear and they have wised up to the problem that they are producing these great works which somehow are not getting through. So today the Financial Reporting Council has launched a project to simplify the content of annual reports - to eliminate duplication between regulatory bodies, work out if there are simpler ways to put information across and embrace the concept that it is better to be broadly right than precisely wrong. They deserve support and deserve to succeed.
