LJ 2009-02-10 11:07:00

Feb 10th, 2009 | Filed under LiveJournal Import

It would appear that Robert Peston doesn’t think that any employee of any bank that received taxpayer assistance should receive any bonus.

The rationalisation for this?

If taxpayers hadn’t rescued those banks then those employees wouldn’t have jobs, let alone bonuses

Yes.. and? That’s something of a non-sequitur, akin to telling a small child that they can’t have sweets, because if Daddy hadn’t gone to work today, Mummy wouldn’t have been able to buy sweets in the first place. I don’t really see how it follows. So I elected to read on, just in case he started making more sense.

So perhaps all bankers should simply count their blessings that they work for banks perceived to be so important to the prosperity of us all rather than for Woolworths – where there was no taxpayer bailout and 30,000 were made redundant.

I see. So what he’s saying is, provided the final outcome for bank employees isn’t unemployment, they should just be grateful. It could be worse.

So I guess I should receive a 10% pay cut, and just be happy that I’ve still got a job. I don’t even care about my own bonus, until this story broke I hadn’t even started thinking about it. Were I to lose it for the sake of keeping people happy, I wouldn’t feel overly bad about that, though it would still be useful to have.

But the point is, I have yet to see a good justification for not paying any bonuses, at least none given by anybody who understands how a bonus is intended to work. Two members of staff might each receive £17,000 basic salary per year. One of those people has hit all their targets, the other has not, but has still performed adequately. The bonus allows the company to pay the better performing staff member £18,000 while the other gets only £17,000.

Now, this money not being a part of the basic salary means that next year, if the person who received a bonus doesn’t meet their targets, the company has no obligation to match their previous salary. That makes good sense business-wise – the pay rate is conditional on performance rather than guaranteed as part of the employment contract. Next year, you can put that extra thousand pounds somewhere else instead if you want.

It also makes a lot of sense because it gives you a way to reward strong performance, without which it might be considerably harder to motivate staff to work well. If two people with different levels of work are paid the same because discretionary bonuses aren’t available, then the person performing less well has no motivation to improve, and the person performing better is going to wonder what the point is, beyond customer satisfaction (which is nice, but doesn’t pay the bills).

But finally, this idea that bankers ought to sit back and just be grateful that they still have jobs holds no more water than telling anybody within the UK economy that they should be grateful that they still have banks. The Tesco employee should be glad they don’t work for Woolworths, right..? And they still have an economy that works, thanks to taxpayer funding – so why should they get a bonus?

Ultimately, the taxpayer did not fund banks for altruistic reasons. It wasn’t some favour that the banks ought to repay by scrapping bonuses – it was an investment, with certain strings attached, and a promise from the government that it wouldn’t lead to political interference in the day to day running of the banks. That’s why an independent company was set up to hold the taxpayer’s interest in the banks. The extent of what the government gets out of it are the favourable terms on which they bought into the industry,

On a personal note, I’ve spent about £750 on shares in the bank over the last few years. I’ve also been given (conditional) free shares by the bank, and that shareholding was worth (at its peak) £7,000. As a result of the financial crises, that’s now worth £500 – the thousands of pounds worth of free shares haven’t even kept my initial investment from shrinking. And there are people far worse off than me in that regard, who have lost tens of thousands.

At this point, a bonus might feel like the least the banks could do for their most loyal shareholders and stakeholders, to make up for the financial decisions that have massively harmed their (usually un-diverse) investments.

  1. Mr Flagg
    Feb 10th, 2009 at 14:44
    Reply | Quote | #1

    you know what i smell??? socialism’s sweet scent of decay.
    but i can smuggly say that being in a country where the banks don’t need a penny of govt. money.

  2. Woz
    Feb 11th, 2009 at 09:13
    Reply | Quote | #2

    Working in an industry that see’s the full impact of major job losses I suspect this is not a view shared by many outside of the financial or insurance services sector.

    Daddy goes to work to earn money to provide sweets. I don’t work my nuts off so you and your colleagues can enjoy your bonuses.

    I do agree that individual bonuses agreed against objectives as part of a performance management process are obligations organisations should fulfill under ordinary circumstances. However, the tens of thousands of people who are losing their jobs every week will have little sympathy for those running the risk of possibly not receiving their bonus whilst seeing their own taxes be pumped into keeping the organisations afloat. Especially when you consider where the finger of blame is squarely pointing at the moment.

    Few other private sector organisations have a fat buffer from the government to absorb. I can think of one reason bonuses should be honoured. I can think of plenty more reason why they shouldn’t.

    If I worked in F&IS I would feel the same as you. Its our natural want to protect our own and reap the rewards of our own efforts. Alas, we all have to cut our cloth accordingly and its not uncommon in difficult financial climates for organisations to withold bonuses, put a hold on pay rises and in some cases cut pay for the greater good. Why should our banks be any different, especially when their survival owes a great deal to public sector handouts.

    • James
      Feb 11th, 2009 at 09:34
      Reply | Quote | #3

      I don’t work my nuts off so you and your colleagues can enjoy your bonuses.

      No, but to be frank, I don’t give a toss what you go to work for, the bonuses are being paid out of the profits that I help to create :oP

      However, the tens of thousands of people who are losing their jobs every week will have little sympathy for those running the risk of possibly not receiving their bonus whilst seeing their own taxes be pumped into keeping the organisations afloat.

      Until such time as the tax burden on the average taxpayer increases, they’re not actually experiencing that though. Not to mention the fact that thanks to the public’s narrow minded view, I suspect that the tens of thousands of people who are losing their jobs would begrudge anything that looks like it’s going well for banks.. Should we also give up cost of living payrises because “Hey, at least you’re not getting laid off”?

      Especially when you consider where the finger of blame is squarely pointing at the moment.

      Not at my bank ;o)

      its not uncommon in difficult financial climates for organisations to withold bonuses, put a hold on pay rises and in some cases cut pay for the greater good. Why should our banks be any different, especially when their survival owes a great deal to public sector handouts.

      Because it’s not being done “for the greater good”, it’s being done to stop people getting offended. The only practical argument I can see is that a few people getting bonuses will increase their income and push inflation up a bit at a time when lots of people are hard up, but there just aren’t enough bonuses to have even the tiniest effect on that (not to mention the fact that economic stimulation would be quite good right now). Limiting pay within a profitable company during a recession just to placate an entirely different (and disconnected) group of people is just pandering, it’s not a good decision.

      Assuming that the money didn’t go into bonuses or pay rises, presumably it would go into buying back the preference shares that the government holds in our business. Given that the tax burden of this entire exercise has been deferred, paying back the government won’t materially affect anything, because the taxpayer hasn’t yet felt the cost of injecting capital into the banks. Not to mention the good 10% return that we’re having to pay on those shares anyway, which should keep the government good and happy for a while yet – we might be a burden to the national balance sheet, but the taxpayers have yet to even notice..

      In fact, if we assume that the value of banks will increase, then it’s in the government’s best interest to hold off on being repaid for as long as possible – if we buy back our shares at the bottom of the market (and indeed for less than the government paid for them right now) and before we’ve paid out the 10% dividend, then that doesn’t leave the government in the best place…

  3. Woz
    Feb 11th, 2009 at 10:15
    Reply | Quote | #4

    No, but to be frank, I don’t give a toss what you go to work for, the bonuses are being paid out of the profits that I help to create :oP

    I was merely pointing out that it was a very poor analogy.

    Until such time as the tax burden on the average taxpayer increases, they’re not actually experiencing that though. Not to mention the fact that thanks to the public’s narrow minded view, I suspect that the tens of thousands of people who are losing their jobs would begrudge anything that looks like it’s going well for banks.. Should we also give up cost of living payrises because “Hey, at least you’re not getting laid off”?

    So the value of joe publics opinion is based on their level of taxation? I pay over £26k a year in income tax alone. Does that therefore mean my opinion holds more water than yours? Yes I am assuming this was your intended point but it does honestly read that way. Its a little too capitalist for even my tastes.

    Whats amusing is I am guessing you’ve not been through the stress of redunancy whilst carrying the burden of the welfare of your family. So the glib response regarding begrudging banks anything thats going well for them is one made, in all honesty, from a perspective of inexperience. I hope you never have to go through it.

    Not at my bank ;o)

    I have to appreciate the irony as I have just closed a call with a director from your bank.

    Its not being done to stop people being offended. If it is being done, it is through a very practical business reason which is employer branding and brand protection. These are the intangible sides of business which can prove to be worthwhile investments in themselves.

    In the bigger picture though, given our govt doesn’t have a bottomles pit of money its the cost of the govt not having that money today that probably irks most people.

    • James
      Feb 11th, 2009 at 10:34
      Reply | Quote | #5

      I was merely pointing out that it was a very poor analogy.

      Yeah, I’m known for those… :o)

      So the value of joe publics opinion is based on their level of taxation? I pay over £26k a year in income tax alone. Does that therefore mean my opinion holds more water than yours? Yes I am assuming this was your intended point but it does honestly read that way. Its a little too capitalist for even my tastes.

      Yeah, I see what you mean. What I meant to say was that at present, “the taxpayer” that bought into the banks has yet to receive a bill. From “the taxpayer”‘s point of view, they have done nothing yet because everything is just being kept as a huge minus on the balance sheet until such time as the government starts trying to raise taxes.. So for “the taxpayer” to then say “We helped you so you need to do what we say” is kind of.. off.. I’m not saying that help wasn’t rendered, but that help was to preserve the economy of the whole country, not to keep individual companies solvent, and thus far “the taxpayer” hasn’t had to pay for any of it, but has reaped the rewards of a financial system that still functions. So this idea that people have that banks have some sort of obligation to them because of something that they might have to pay for in taxes later is a bit premature.

      Whats amusing is I am guessing you’ve not been through the stress of redunancy whilst carrying the burden of the welfare of your family. So the glib response regarding begrudging banks anything thats going well for them is one made, in all honesty, from a perspective of inexperience. I hope you never have to go through it.

      I’ve been through the stress of my father being made redundant a number of times, it sucked on every occasion. However, an attitude of “this sucks for us, things should suck for other people too” just doesn’t hold – creating injustice for others so that everything appears equitable is a really dumb idea of “fairness”.

      Its not being done to stop people being offended. If it is being done, it is through a very practical business reason which is employer branding and brand protection.

      Yes, but now you’re just toying with semantics. It’s being done to stop people being offended because if they are offended, then that harms the brand.

      It came as no surprise to learn that Eric Daniels has declined to take his bonus, and I wouldn’t be surprised (or particularly upset) if it transpired that I wouldn’t receive a bonus myself. What bothers me is that it would be necessary to tell a profitable business that the amount that they’ve set aside for staff remuneration (typically as low as they can get away with anyway) needs to be further reduced to remove the bonus portion.

      Ultimately, the public probably doesn’t care if we had a 4% pay pot or a 3% pay pot. I doubt they’d be unhappy with the 4%, they don’t know what context those figures exist in anyway. But they would be unhappy with us putting aside 3%, plus 1% in discretionary bonuses for regular staff, because they hear the word “bonus” and think “Oi!”.

      So if it’s just part of the standard pay, that’s fine, but idea of a bonus is a huge no-no because people have listened to too many soundbites in which “bonus” is a dirty word.

      (to be continued..)

    • James
      Feb 11th, 2009 at 10:34
      Reply | Quote | #6

      These are the intangible sides of business which can prove to be worthwhile investments in themselves.

      I agree, but that line of thinking also justifies “We decided not to give you pay rises this year, instead we’re spending the money on advertising because it’s a better business decision”. That doesn’t make it the right decision to make – keeping staff happy is also an important (if intangible) side to the business.

      Again, I’m talking more about staff in branches who have met very specific sales targets set out at the start of the year – I have no idea how our bonuses are even worked out, or if I would even get one anyway.. :o)

      In the bigger picture though, given our govt doesn’t have a bottomles pit of money its the cost of the govt not having that money today that probably irks most people.

      I might not be giving “the taxpayer” enough credit here, but I rather suspect that while that is the case, and the government would quite like that money, that’s not what most people are thinking now. Unless they work in the industry or have been paying special attention, they’re not going to know the terms under which the banks were funded – I bet half the public is of the opinion that the banks were just given a ton of money, or that it was done because the banks were going bust or something.

      So they sit there saying “They’d have been bankrupt if we hadn’t given them all that money”, when really it’s that “They would not have had capital reserves sufficient to meet new government mandated targets if the treasury hadn’t bought into the banks under very favourable terms”.

      When you put it the second way, it stops seeming so greedy for banks that are still generating profits (which has nothing to do with their capital reserves and is therefore not driven by what the government has done (except that the banks have avoided unprofitable runs on savings because of it)) to reward the staff that most contributed to those profits. Without the staff members who are helping the bank to turn a profit, the government will never get its money back, and the taxpayer will end up footing the bill.

  4. Woz
    Feb 11th, 2009 at 11:32
    Reply | Quote | #7

    Gah I’d love to debate but for some reason I appear to have to work for my money today.

    The funny thing is my Dad was up in arms about the thought of anyone working for a bank receiving a bonus as he bought into the TV hype. I defended the individual right to receive reward for their efforts quite strongly in that discussion citing such bizarre examples as the cleaners being given financial incentives to maintain a certain level of hygiene in banks communal and customer areas etc. Its not their fault we are in a financial downturn so why should they not receive their promised reward for delivering on their promise to the employer.

    As you can tell – I am contradicting myself and thus have no really clear view on this. Suffice to say, on a general level it feels wholly wrong. Especially when you consider the financial interventions from the govt. Take that out of the equation and I couldn’t give a monkeys in all honesty. But then, I give away nearly two days a week to the tax man and it irks me like you wouldn’t believe. Its Wednesday today though so my efforts are rewarding me. I reserve Monday and Tuesday as my tax days.

    On the individual level – its a different matter but alas you can’t start a witch hunt to exclude people from bonuses and include others as they carry no blame.

    I just really feel for the people I see every week coming to us for support because their world has fallen apart.

    • James
      Feb 11th, 2009 at 11:54
      Reply | Quote | #8

      Well, in spite of how strong my view might seem, I’m in two minds about it.. I can see the reasons for not paying bonuses, but the arguments currently being made seem to be tabloid-informed rubbish based on an aversion to the word “bonus” based on fat-cat connotations rather than anything that actually relates to the circumstances themselves.

      And as far as the people whose worlds have fallen apart go, I would gladly relinquish any right to a bonus, and suggest that others should lose their bonuses too, if I thought that the money would be paid to the treasury and would then go towards helping people who are in need right now.

      I mean, in effect that would be the equivalent to a lump sum of my salary going off as taxes, which I’m not opposed to in principle. But as is so often the case with taxation, it would be nice if it went somewhere appropriate – so that means funding the creation of new jobs, support for people who are having to claim job seeker’s allowance, and more government bailouts of long-term-viable, short-term-insolvent businesses. I mean, take Woolworths for example – if one could have shown that Woolworths would be profitable again after the recession is over, then I would have no issues with my bonus being witheld, that money going to the treasury, and the treasury bailing them out.

      But do I think the money would be put to that sort of use? Not really. I would like the sort of socialism in which the government would step in with its large reserves of money and bail out companies if they thought the company would be able to pay it back and survive long term. But what we’ve got is capitalism pretending to be socialism, in which bailouts are only given to those companies upon which the success of the whole economy depends. Banks, large manufacturers, they’re given money for the good of the economy. I would happily give up my bonus if it meant companies could be given money for the good of the people. But that’s not where my money would end up.

      Still, I ought to feel happy that at least the taxman only takes my money up until ten past eleven on Tuesdays – logically, doesn’t that make me more productive than you? ;o)

      • Woz
        Feb 11th, 2009 at 12:11
        Reply | Quote | #9

        Hah! I guess so. You certainly enjoy a higher percentage of your effort than I do on an input/output basis.

        Doesn’t that make me more socialist than you? ;0)

        • James
          Feb 11th, 2009 at 12:12

          Crap..

          • Woz
            Feb 11th, 2009 at 12:20

            The good news is the organisations who do provide transition support for their employee’s pay for it. Its not cheap either.

            At least they can put it in their CSR reports for some positive marketing.

  5. Woz
    Feb 11th, 2009 at 11:40

    I have to ask a question though. Its a genuine question from an ill informed point of view so i am looking for an insider opinion on this.

    If interest rates are being cut to record lows as we all know. Why is the cost of borrowing now generally higher than anytime over the last 2-3 years. Is this just because the banks are now hugely risk averse? If thats the case is it a knee jerk reaction.

    I’m referring to the cost of borrowing cash generally as I haven’t looked into mortgages for a long while but I am guessing the situation is the same there.

    • James
      Feb 11th, 2009 at 12:10

      Basically yes, the cost of consumer lending is based on the “real” cost of borrowing money, which is dependent on the banks lending to one another.

      As far as I know, the interest rate that the Bank of England quotes is the rate at which they will lend money overnight to banks, which isn’t much use when you need to borrow large chunks of money for three months at a time. So the London InterBank Offered Rate is based on the expected risk of lending, which used to be a fraction above the base rate, but now has a huge premium.

      Barclays are a good illustration of why – their current market value is just shy of £9bn, with annual profits of about £6bn. Nobody is valuing the bank in the long term, nobody actually believes it’s worth more than a year and a half’s worth of profits, and that sort of mentality bleeds through to the money markets (or is alternatively generated by the money markets, I’m not sure who gets the ‘doom and gloom’ hat on first).

      So if its investors don’t think that Barclays is worth all that much, then why should we look to lend money to them for extended periods of time? They, naturally, think the same about us.

      So the banks don’t rate each other highly, investors don’t rate banks highly, and there’s just no trust. On those days when we’re short of money nobody will lend to us, and on those days when we have more than we need, we won’t lend to anyone else. It’s a ridiculous vicious cycle, but it’s “the sensible approach”….

      As for mortgages, it really depends on how much cash you’ve got (or got access to). If you can put a decent deposit down (we’re putting down 20% on ours) then banks will give you fantastic rates (we’re getting a base rate tracker which is currently around 3%), presumably because it being secured lending against assets that are unlikely to lose 20% of their value, they can afford to do it. I mean, that’s still 2% over the BoE rate, but it’s a fairly good rate. The difference is based on the difficulty in sourcing money (and the margins of course).

      Of course, if we didn’t have the deposit, we’d either have to borrow at a much higher rate, or just wouldn’t be able to borrow anything at all. And any higher rate would be specifically down to how risky they decided that we were individually – the difficulty of sourcing money is already taken into account with the 1% -> 3% uplift, so if we got the mortgage at 6% then that extra 3% in there would be just our personal level of risk (and would probably price us out of the market).

      Oh the fun of it…

  6. Woz
    Feb 11th, 2009 at 12:18

    Thats logical and I didn’t even contemplate the mechanics behind the way lending works!

    So if the Government surely understand that, why do they bang this drum about passing on the low interest rate to borrowers? I appreciate they want cash in the economy but do they really want to increase lending and therefore potentially risky borrowing to get it?

    • James
      Feb 11th, 2009 at 12:46

      I think part of the reason the government was saying that was because the public was saying it, and they wanted to sound representative of the people or something. Just chiming in with whatever nonsense the papers put out so as to look like they care about what the public cares about, even if the public was wrong to care in the first place.

      As the base rate came down, the margin between LIBOR and the base rate increased due to a lack of trust, which gave the impression that the “official” interest rate was falling, but lending rates were staying the same. Ideally for people to believe that the Bank of England is actually in control of anything, you’d want there to be an obvious-enough-for-Sun-readers correlation between the actions of the Bank and the lending rates, and without that people started getting a bit cross..

      As I understand it, there are all sorts of schemes coming up that will guarantee lending between banks and companies, in such a way that it should reduce some of the fear and suspicion and make way for lower rates. And it’s membership of those insurance schemes that the government is thinking of using to reduce bank bonuses – they made an error when they pumped all the money into the banks in that they didn’t make as many demands as public opinion later wished they had. There were no terms for accepting funding that would have limited bonuses, and Barclays and HSBC didn’t get funding anyway, so wouldn’t have been bound by those rules.

      However, if they bring in a new insurance mechanism for inter-bank lending that would safeguard the amounts, then all banks would need to sign up for that, and one of the conditions can be some sort of upper limit on executive bonuses..

      And that ought to bring the rates down, I think.. though I’m not sure quite how the dynamic works. Do they need one institution to lead the way in reducing the interest rate at which they lend money? Because no bank is going to want to lend money to somebody at 3% today because they have a surplus, only to need to borrow money tomorrow at 4% from a bank that is being sluggish reducing their rate. So without knowing how the whole system is kept in sync, I don’t know how easy it is to start moving rates down, but that seems to be the general aim anyway..

      That won’t stop your individual risk hiking the cost up by 3% in that last example, but it will remove that 2% minimum margin between the lowest rate available to customers, and the base rate (plus marginal profit).

      In theory…