Breeding The Culture of Greed: Behind Big Banking Bonuses In The UK

March 7, 2012Financialsby David Smith

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Breeding The Culture of Greed: Behind Big Banking Bonuses In The UK

Despite losing billions in 2011, bailed-out British banks, including Lloyds and RBS, continued to pay out millions in bonuses to its top executives. The government has also thus far refused to step in, while public pressure mounts on the executives and politicians. Why are big bonuses still a prevalent part of banking culture and is there really nothing we can do?

When Royal Bank of Scotland (RBS) boss Stephen Hester waived his £963,000 bonus in January this year, he wrote a candid letter to his staff revealing the motive behind his decision. Hester confessed to workers at the largely state-owned bank that press coverage “had been discomforting to say the least”.

Hester’s surprising admission proved that even bankers are not immune to the psychological pressures of a guilty conscience. The newspaper articles had expressed outrage that a bank, which was bailed out with £45 billion of public money, had paid £785 million in bonuses for 2011 despite losses of £2 billion.

Although Hester waived his bonus under duress, other senior executives at RBS received their million-pound bonuses and the company’s 17,000 investment bankers amassed a total of £390 million.

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Meanwhile, Prime Minister David Cameron refused to impose legislative solutions to restrict bonuses at the state-owned bank. He simply urged RBS politely to show “restraint” in its awards for senior executives.

“We are not going to micro-manage bonuses... The banks are doing a good job and making good progress,” was the official Downing Street line.

Professor Stefano Harney, an expert on business ethics at Queen Mary University London, though is one prominent voice who believes the Government should step in to limit executive compensation.

“We need permanent change to proactively tackle the issue,” he said. “Laws must be in place well before we are in the absurd position of a publicly owned bank’s management having the Government over a barrel.

The UK Government has done nothing yet, but claims it intends to legislate to give shareholders a binding vote on executive pay. At present, shareholders have a non-binding, or advisory, vote on pay. Measures under consideration include shareholders getting a veto both on pay packages and on deals given to executives who leave jobs in which they have failed. An announcement could be made in the Queen’s Speech in spring.

Opinions however differ about the effect the proposals would have on the pay structures and bonus packages of Britain’s top executives, which have risen by an average of 4,000 percent in the last 30 years according to the High Pay Commission. 

Under the present rules, Professor Cary Cooper, a distinguished Professor at Lancaster University Management School, says there was nothing the Government could do to prevent RBS handing out massive bonuses despite its losses.

“The Government missed the opportunity when they bailed out RBS and Lloyd’s in 2008 to put clauses in the contracts saying there could be no bonuses for anyone until the public-owned banks were back in profit.

The rule ought to be that until the entire bank is profitable, no individual should get a bonus. Some of them were working at RBS when it went bust, so they can partly be held responsible. In hindsight, the Government was in a rush and panicking a bit.”

Cooper dismissed the banks’ argument that high bonuses are necessary to attract and retain the best talent as a myth. “It’s the classic blackmail argument used by bankers. But the answer is – ‘well, you are not making profit, so we can’t afford it until you work more efficiently’.

“If they want to go for bigger bucks elsewhere, let them go. It’s a young man’s game and there’s new talent coming through in the banking world all the time. If they are totally money-driven, that’s the kind of greedy attitude that got us into this mess in the first place. The bottom line is they will sell any product no matter how risky to get money.”
 

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The story at Lloyds, the other bailed-out British bank, is more complex, and demonstrates the difficulties of imposing controls on the banks. 

Unlike RBS, Lloyds fell foul of new regulations, introduced by the Financial Services Authority after the 2008 crisis, which said that bankers should have to give back part of their bonuses if their bank performed worse than expected. Lloyds, which owns Halifax and Bank Of Scotland, made a £3.2 billion loss after mis-selling PPI credit insurance and was forced to make a retrospective reduction in the size of its 2010 bonus packages.  

A total of £2 million was cut from executive compensation. Former chief executive Eric Daniels had to surrender £570,000 of his £1.45 million bonus and other directors and executives gave up between £100,000 and £250,000 each. RBS also mis-sold PPI insurance, but it was not required to claw back bonuses from executives under the new rules because it stopped selling its main PPI product at the end of 2008.

The bonus reductions still left Lloyds’ bankers with huge awards, which totalled £375 million for 2011 and critics argued that £2 million was a paltry sum compared to Lloyds’ huge losses of £3.5 billion for 2011. Also, because the clawbacks are at an executive level, their influence over the majority of bankers will be limited.

Neither is the FSA judgement on the Lloyds’ executives particularly damning to the reputations of the executives. The FSA said withdrawing bonuses did not amount to an admission of guilt over PPI mis-selling, so the bankers would not be disqualified from jobs in banking. Lloyds admitted only that its executives were “accountable”, but said they were not “culpable”.

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