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Assertions by politicians that legislation should be introduced against high bank bonuses have been treated with ridicule in the business community, not least because the ministers and MPs are clearly jumping aboard a populist bandwagon and have so far failed to offer any specific proposals as to how their ambition should be achieved.
In the City, the prevailing mood is very much that a personal contract is an individual's castle. No government, the bankers predict, could make serious inroads into their earnings. And any move by the UK authorities against bonuses faces the possibility of driving away banks and bankers who do not need to be here and could ruin the City's hard-won position as a leading world financial centre.
There is a way, however, of treating bonuses that should at least merit further consideration, which is to restore “ownership” of the banks to the bankers themselves, to make them more responsible for their actions and therefore alleviate the wild risk-taking and short-termism that got them (and us) into such a mess.
Instead of awarding them wholly cash bonuses and, in the case of the senior executives, additional free share options, they should be required to commit a substantial proportion of their remuneration to buying shares in the bank at the prevailing market rate and keeping them for three years. I've tried to find a hole in this formula but for the life of me I can't.
It's true that a bank that liked to encourage its staff to take equity was Lehman and we all know what happened there. But Lehman was a one-off. It was run by a boss, Richard Fuld, who was increasingly divorced from reality. While the bank was sitting on enormous sub-prime positions, it's also the case that Fuld could have sold the bank but didn't. Much of Lehman's underlying business was sound, as has been made clear by a delighted Barclays and Nomura which later snapped up large chunks of its operations.
If Adam Applegarth had invested his own money in Northern Rock (as opposed to having been granted options) would he have pursued quite the aggressive growth path he did, with the same disastrous results? It might have caused the Newcastle bank's chief executive to choose a less dangerous route, one where the profits incline was still upward but slower and safer.
Likewise, would Sir Fred Goodwin have committed so much of Royal Bank of Scotland's money to purchasing ABN-Amro if it had been his own cash he was spending? Having used a portion of his bonus to buy shares in RBS at the then market price (again, as opposed to being handed them on a plate in the form of options) and facing a hefty personal loss if they went down, he might have thought twice about it. Similarly, the chiefs of Lloyds might have hesitated before taking the plunge on HBOS.
For it to work, the UK cannot act alone. All countries must sign up to the same policy and all banks must be made to follow suit. But the worry with the present headlong rush is that this country will end up being isolated, with half-baked rules and the internationally held perception that we are somehow “anti-bonus”. Under this proposal, the bankers still get their bonuses but they are tied in to the bank's performance.
It's that lack of ownership, of longevity and attachment to the bank, which is missing from the present structure. Last week, the new RBS chief, Stephen Hester, sold £72,000 of shares in the bank that were given to him to pay a tax bill. What example is he setting to his colleagues, both senior and junior? I rest my case.
Reader views (1)
Unfortunately Lehman's was far from a "one-off".
Take a look at Andy Hornby at HBOS & numerous other examples where equity ownership did not act as a restraining factor.
Legislating to force shareholders to vote on remuneration as a separate issue to all other resolutions would be a step forward. At present shareholders can't vote down remuneration plans without undermining management (hence the abstentions), and management know it & abuse it.
Limiting management pension pots to a multiple of the benefits paid to the lowest earning member (pro-rata on service) might also be worth pursuing.
The situation is complex and the solution will therefore be complex. Any credible approach will need to encompass both CEOs and football centre forwards. Good luck.
- City Fund Manager, London, UK, 21/08/2009 22:33
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