There are many kinds of bankers bonuses as there are types of well-worn shoes and sandwich-for-lunch briefcases. Variable bonuses depending on relative performance measures using peer-group data, narrow performance bonus, guaranteed absolkute bonus, fixed % bonus, various algorithmic bonuses, and on and on. The general public is enraged. the fact is that for people employed in investment banking especially, remuneration is the only moral incentive, whether ethical or not, and the prospect of extraordinary above average lump sum winnings is what creates the culture of 'gold-rush city' that defines the society we know of as investment banking. 
Change the bonus culture and everything changes! Revolution!Yet, it is wholly clear to shareholders and policy-holders that years of "we are here first and foremost to serve our shareholders/policy holder" was pure cant, apalling hypocrisy. This is how it seems to joe public and joe politician!
Ms Christine Lagarde, France's Minister for Economic affairs, according to Forbes Mag one of the world's 100 most influential women, acknowledges that it is “tough” imposing higher standards on French banks, in terms of pay, that could put them at a competitive disadvantage in recruitment. “It is not fair that some players are playing by the rules and that some players – especially when they are highly subsidised – are simply ignoring the rules.” This is surely an all too simple and obvious objection to reining back bonus culture. Are we to believe that higher ethical standards will not attract customers seeking to do business with more ethical banks? Why should stamping on the flames of bonuses not work when all countries apparantly agree they must do the same? What are bonuses worth for people whose jobs are no more taxing than keeping odds at a racetrack, something the cleaning staff could do just as well in many banks? But she said Paris as a financial centre stood to benefit from the enhanced reputation of its universal bank business model – combining investment banking with retail operations, – and of its regulatory system, and from London’s tarnished image. Why oh why must trivial inter banking centre competitiveness be part of the ethical equation? “I don’t think we have been guilty of the same excess, not to say that we have been paragons of virtue,” she said. Ms Lagarde has made the promotion of Paris as a financial centre one of her priorities since becoming finance minister two years ago.
Banks that have started to pay their staff guaranteed bonuses again are an “absolute disgrace” and should be reined in by governments at the G20 summit in September, according to Ms Lagarde. The same is being said by UK's Treasury select Committee. They valiantly continue to say that bonus culture lay at the heart of the factors creating the credit crunch crisis. All are however stumped not a little by Goldman Sachs recent quarterly results indicating average bonus of half a million per employee! The trading eranings may not be repeatable. In the US it is argued by some commentators that much of Goldman's golden performance was pump-primed by the cheap $10 billions loaned to it by the US Treasury?
In what she described as a “cri de coeur” against the return of “the old ways”, Christine Lagarde urged other G20 governments to stop “procrastinating and introduce curbs on pay practices deemed to encourage too much risk-taking. I think it is an absolute disgrace that guaranteed bonuses of several years could still be paid, or that some people are thinking of reinstating the old ways of compensating with insufficient relationship between compensation and lasting performance and risk management” (in a Financial Times interview). Citigroup, Deutsche Bank, Nomura, and others have offered multi-year guarantees to recruit and retain key personnel, although they insist that the practice has been limited to recruiting and keeping top talent. bankers of the investment variety are very keen to maintain the illusion that personal contacts and individual intellects make all the difference. One of the reasons banks have resisted economic models and linking their performance to macro-prudential analysis as required by Basel II Pillar II is because even when a rising tide lifts all boats they wish to maintain the fiction that absolute performance has been entirely generated by increased staff productivety and reward bonuses accordingly, however that 'accordingly' is calculated? It has undoubtedly been because banks have been diffident and negligent about economics that they have collectively got themselves into the mess of losing twice their reserve capital, double what a severe recession could be expected to diminish.
The staff retention and recruitment argument is of course bizarre since this is not formally part of bonus calculation models as banks describe them, in their annual report to shareholders, and because it is only arguable when banks are not all being forced at the same time to severely cut down on bonuses. The fact is that banks have always varied the golden hellos, share options, and wage rates and bonus deals to compete for key staff however and whenever they choose to. Ideally, we would make this a matter for shareholders to exert control over and for regulators to analyze from a systemic risk aspect. The problems are that shareholder votes are not open and fair, especially not when sufficient support for retaining the bonus culture is always available from the major shareholders who are also financial institutions with bonus cultures. The regulators and legislators however have built up ammunition to argue strongly for a radical change.
The last refuge for the scoundrel has to be "but this will damage the competitiveness of our financial centre" argument. That is of course ludicrous. Bankers are sticking their heads in the sand with respect to admitting what went wrong and why, and moreover saying yet again to shareholders "we own this bank and this banking centre, not you!" Ms Lagarde's view is a shared one and correct to say this should be a G20 and therefore also an EU-wide issue. To set the agenda in proper detail, hwoever, some centres should and could move first. French banks have agreed to forego such payments, to link bonuses to the profitability of the bank and include claw-back provisions. If they do not they face the possibility of higher capital requirements imposed by the national supervisory regulator. The UK’s FSA this week warned that banks that have agreed to guarantee executive bonuses for more than a year risked similar heavy penalties. Undoubtedly others now have to follow suit, the quicker the better some may say. In my view, it should happen anyway because those 'stars' at the top are not the performance difference makers they fondly imagine themselves to be. And, finance being global is inevitably forced to apply common accounting, risk regulation and therefore also remuneration standards. FSA'a draft 2,000 word code suggests higher fixed salaries, more emphasis on risk management and withholding back the bulk of bonus payments until it is clear they were based on good business sense. The FSA does not set any limits on the multimillion-pound rewards. The amount of pay that can be earned, says the FSA, remains "a matter for firms' boards". Are we supposed for 'boards' to read 'shareholders' votes? I wish the FSA had made that plainer.
Like much else, especially short-selling, one feels that the FSA's rules-drafting has been reluctant and duplicitous in allowing glaring gaps. Many banks demand that bonuses continue to be payable to persuade key staff to stay and reward talent, even though their firms would have collapsed into bankruptcy without government help.
A survey by efinancialcareers. com showed two-thirds of experienced bankers accept the bonus system requires reform. Amazing to think that one third does not? It is scarecely one third who receive bonuses! However, three-quarters of front-office operators oppose caps on cash bonus payouts and more than half said they would consider moving abroad if bonus caps are imposed.
This response is the bonus-culture talking. It is the very fact that so many staff think they can walk and take business with them that is the delusion at the ehart of this culture. let them go and see what happens! Call their bluff! According to the new FSA code, bonuses should be based mainly on profits, rather than gross or operating revenues, so that the net quality of business growth generated can be assessed. The individualism of bankers militates against a holistic accounting. They want to be rewarded for their profit centres and not for the the group performance. This shows how banks have become more like franchise conglomerates with only the capital at the centre! It is a view that is indifferent to professional financial risk management where risk diversification and liquidity management are key. Investment bankers believe capital is always available for a profitable deal and it makes no odds to them where that capital comes from i.e. from retail deposits or interbank funding gap finance.
Bonus payouts should also, according to the FSA, reflect the cost of capital and liquidity. In which case many profits of many profit centres would turn to zero or negative in the last 2 years. You try telling an M&A fee earner that because of cost of capital, risk reserve ratios and the collapse in private liquidity finance, that he, or she, should now get no bonus! These arguments make macro-prudential sense, but front line investment bankers treat such bankerly concerns with abslute derision and distaste, albeit for the most obvious self-serving reasons!
The code also says that staff must forfeit bonuses, regardless of profits, if firms have poor risk management or fail to work within regulations. this would be terrific in practise and suddenly the risk managers walking the trading floor might actually get some long overdue respect. Risk managers dream on!
The FSA also says that remuneration committees should use "independent judgment" and they may be asked to submit an annual report to the watchdog. The chairman of the remuneration committee may also be asked in for interview with the FSA to presumably explain the bank's various algorithms for determining bonuses. This presumes such matters must have a logic. But, the logic about staff attraction and retention, essentially blackmail or bluff, will drive a coach and horses through such deliberations. Some bankers undoubtedly believe themselves when they say or think that hedge funds would be only too happy to employ them and would not baulk at rich rewards and be unlikely to suffer the same constraints as banks. Hmmm, wait and see!
I, as a topflight investment banker, will have a lifestyle to maintain: school fees, club fees and a multi-million pound mortage plus my various other investments for pleasure or financial gain and these will tell me what my minimum annual bonus requirement is. A bank cannot argue with key staff unless it also forces the individual bankers to disclose what lies on their side of their view of the matter such as what they can evidence they need to remain personally solvent etc. Mostly, however, the arguments will proceed in the absence of that and be heavily mis-alligned, coded, and diverted onto bogus performance measurement issues. How different from the good old days of trade union negotiations? If only the banking unions were still in place the banks might have quite welcomed some long strikes in the last two years.
Risk and compliance staff, says the FSA code, must have different targets "determined independently of the business areas". "Firms must ensure that their remuneration policies are consistent with effective risk management." Hey ho, this is regulatory rule by guidance principle and as we know that doesn't work. Either the FSA comes up with precise models and equations or they may as well forget it. This is just political fig-leafing.
The new rules will cover all organisations regulated by the FSA, including the UK operations of foreign-owned businesses. The new code aims to ensure that pay and bonus structures in financial organisations do not encourage staff to take excessive risks. An FSA spokeswoman said the watchdog would "work with" firms whose remuneration policies it finds "inappropriate". Peter Montagnon, director of investment affairs at the Association of British Insurers, which represents many institutional shareholders, said the code was welcome and based on the right principles. But he added: "The code itself needs a lot more work on the details and we are ready and willing to help in this."
Michael Rendell, a partner at accountants PwC and the group's head of HR, said the code would ultimately have an impact beyond financial services and it was "absolutely right" that good corporate governance be placed at the top of the list of pay principles.
One has to laugh if anyone thinks HR consultancies have the capability to work with banks internal HR departments to tackle this thorny bush? The FSA consulted on its proposed code to the end of March.
In may the UK treasury select Committee issued its report. Committee Chairman John McFall said: "Bonus-driven remuneration structures led to a lethal combination of reckless and excessive risk–taking. The design of bonus schemes was not aligned with the interests of shareholders and the long–term sustainability of the banks and has proved to be fundamentally flawed. Our report outlines clear failings in the remuneration committees within the banking sector, with non–executive directors all too willing to sanction the ratcheting up of senior managers’ pay, whilst setting relatively undemanding performance targets. Looking forward, we are also concerned that the FSA seems not be taking tackling this issue seriously enough."
http://www.publications.parliament.uk/pa/cm200809/cmselect/cmtreasy/519/51902.htm
In June, the FSA awarded itself a 40% increase in bonuses!
A full treatment of this issue has to include all remuneration channels including soft loans, share options, postponed bonuses and pension contribution etc. two weeks ago Chancellor darling warned banks not to slip back into their old habits and accused some of complacency now that the credit crisis has eased. "If they go back to the way they were without asking themselves over and over again whether they understand what they are doing, that would be disastrous for them and the rest of the world," (interview in the Independent). "There are people who are too complacent in my view. They need to be brought back to earth." Yes indeed, but then the get-out.
Darling rejected the idea of a salary cap on City workers to stop previous excesses recurring. "You can't have a pay policy in legislation," he said, which seems contrary to his saying that controls on financial institutions generally will be tightened in forthcoming White Paper on financial regulation. Perhaps he believes that bonus culture may be curtailed indirectly rather than by directly capping remuneration per se? He also dismissed talk of a battle between the FSA and Bank of England over which agency regulates the UK's financial sector in systemic risk going forward. "It is not a turf war," Darling said in the interview. "It is a question of ensuring they both do the job they are set up to do and both do it effectively. They are not competing with each other. They are complementary". That is indeed true. The media comments overlooked the fact that the Bank of England always retained responsibility for systemic risk. And, it is arguable that bonus culture is a systemic risk or macro-prudential matter, not a micro-prudential matter at the level of individual firms.
The FSA Consultation paper 09/10 (http://www.fsa.gov.uk/pubs/cp/cp09_10.pdf) titled 'Reforming remuneration practices in financial services' was published in March 2009 on the same day as the Turner report thereby conveniently evading media scrutiny. Turner mentioned bonuses a dozen times, but made one definitive statement only: "...illusory profits were however used as the basis for bonus decisions, and created incentives for traders and management to take further risk. This carries implications for remuneration policies, considered in Chapter 2.5(ii)" (http://www.fsa.gov.uk/pubs/other/turner_review.pdf) Turner says, "A reasonable
judgement is that while inappropriate remuneration structures played a role, they were considerably less important than other factors already discussed – inadequate approaches to capital, accounting, and liquidity." This is I have to say an entirely subjective view. One has only to ask what is the motivation for bankers trading with inadequate approaches to capital, accounting, and liquidity, if not because of the short term bonus culture? Turner discounts bonus culture heavily as a priority. he rehearses the FSA discussion points but ends on a dismissive note. In this respect his judgment is in direct variance with that of the Treasury select Committee and politicians and the general public who see bonus culture as a high priority issue.
The FSA draft code (over 80 pages of guidance principles) offered another period for consultation responses up to 18 May 2009.HM treasury are moving ahead too. The FSA and the Bank of England are both set to get more powers, with hedge funds likely to come under the sway of the FSA. This will change the context considerably if hedge funds are subject to similar oversight and rules as apply to banks.
Ms Lagarde said that all leading economies should quickly adopt similar principles to those laid out by the Financial Stability Board, an international forum of central bankers, treasury officials and supervisors. “We have the rules now. It is not a question of reinventing the wheel, or procrastinating about them. It is a question of applying a set of rules that have now been agreed by the Financial Stability Board. The utmost priority should be given to their implementation,” she said. Her ‘cri de coeur’ is against a return of ‘the old ways’, but i have to say that such a return is porecisely what most of my banking friends and acquaintances expect once this temporary glitch of worldwide recession and credit crunch silliness is out of the way, and meantime what blind bit of economic good would be done by harming their "ability to pay the school fees and the five grand a month mortgage,I ask you? And the sooner Cameron and his chums get into power who at least understand this much, the better!" Oh, if only PG Wodehouse was alive and writing a City column!
