Wednesday, January 12, 2011

Bank Bonuses

Here we go again. Once again, the banks are about to pay out significant bonuses to their people, based on bad performance. Once again, the media are kicking up a storm. Once again, the politicians are talking tough... and once again they will fail to do anything about it.

Now, I should preface this by saying that I don't, as a matter of principle, have any great problems with companies paying bonuses. They help companies attract the top people, and they encourage success by allowing employees to share directly in the success of the company.

But that's the key point there: they allow employees to share in the success of the company. At the moment, the banks are not successful companies. They are not doing at all well, having required massive bail-outs, and still being excessively publicly-owned. So, there is a very strong case for not paying bonuses.

So, what should be done?

Well, firstly, it must be noted that many of these bonuses, and the terms under which they are paid, are specified in the contracts of the employees. In this case, the banks must pay them out, per the terms of the contracts. That is actually the right and good thing here - we can't have companies just ignoring their obligations to their employees, or else large companies will start screwing over their employees (even more?). (And any 'dodge' by the government to try to claw back this money, or levy an extraordinary tax on bonuses, or whatever, would be equally distasteful.)

However, where there is any discretionary element to the payment of bonuses, this must be blocked, at the very least until the bank in question turns a profit, if not until the bank is freed from public ownership. In fact, it should have been an absolute condition of the bailout that companies accept that "discretionary" bonuses not be paid. (And, also, that any bank that is judged "too big to fail" must likewise accept that it is "too big", and must therefore be split up, but that's another rant.)

Going forward, any new employee contracts really must be drafted with better control over bonuses, and crucially with a clause in place that can halt the payment of bonuses under sufficiently bad conditions. (Where "sufficiently bad" needs defined in the contract, of course, but needs to include "in the case of public bailout".)

And, finally, we should be looking at renegotiating the existing contracts as far as possible, to insert the clauses above into the contracts.

So, that's what the government (and banks) should be doing about this madness. As for the bankers... well, I feel that in most cases, they should be declining these excessive bonuses, until such time as the companies are back to where they should be. However, that really is a matter for the conscience of the individual.

(One last thought: when the banks do get back to profitability, and do manage to free themselves of public ownership, and especially if they do so in a manner that actually makes a profit for the public, those who have led them from the mess and back to where they should be absolutely do deserve bonuses for those actions. Once the job is done, and not before.)


Captain Ric said...

So, if the investment arm of a bank turns a huge profit (larger than expected), but the private banking arm (say) makes a massive loss, such that the company as a whole still makes a loss, do the bankers from the investment arm still deserve bonuses?

Steph/ven said...

No. The economy is in the tank, and we have a lot less flexibility than we should have in large parts because so much public money is tied up in keeping the banks afloat. Keeping their companies going (and so keeping their jobs at all) is hurting us all.

As such, there is no justification for paying any sort of discretionary bonus, at the very least until the company as a whole turns a profit, and ideally until they're free of public ownership.

Want the freedom to pay out large bonuses? Fine - wean yourself from the public purse.