A cursory look around the various media channels will show you that the ‘burning question’ of ‘should bankers be paid their huge bonuses’ is a hot topic on everyone’s lips. Here Chris Archer from our Executive Resourcing team gives us his perspective:
Unfortunately the skewed world of 24 hour popular news media means that the real issues are often over simplified and salient facts and balanced opinion often go out the window, in the pursuit of the ‘news bite’. Indeed the coverage and the very question that ends up being asked, can actually miss the crux of the debate.
The current argument against bankers bonuses seems to basically be along the lines of the following: bankers caused the crash/recession/depression (or whatever your viewpoint causes you to call it) and then had to be bailed out to the tune of billions by taxpayers. Why should those same bankers expect to receive any bonus for just doing their jobs, when the very people who bailed them out face financial hardship themselves – caused by the very same bankers. Or similar variations to that effect.
Unfortunately, the truth behind this topic is rather more complex than will easily fit into a sound bite news article. The more you dig into this topic, the more paradoxical the arguments become.
First up, did the banks cause the crash/recession/depression in the first place? Not exactly. It takes exceptionally loose monetary policy from the worlds’ central banks on a truly staggering scale to create the opportunity for free markets to behave in the way they have. It also takes naive and greedy governments to put in place laws that empower these central banks and then fail to control their profligacy from causing the kind of distorted markets that end up leading to the bubbles and crashes that we see. Once this form of financial distortion creates excessive money/debt in the system, the markets will then go to work. In this instance the market tool we are talking about is the worlds’ finance/banking industry, which is set up as a money making machine and does what it is therefore designed to do very well.
Add this to the free market skewing effects of ‘crony capitalism’ (where the industry lobbies governments to its own ends, or in fact places its own senior past/present members of staff into positions of influence in government or central banks to its own ends) and you end up with a toxic cocktail for causing huge damage to the world economy. The argument for free markets should be a compelling one, if markets do indeed operate freely, not through bias, undue influence etc. In its current form, the free market has gone out of the window so that you now have a capitalist banking system, backed by tax payer funded bailouts around the world, which in turn has led to the sovereign debt crisis that now threatens us. The whole thing is self perpetuating and cannot solve its own problems because of the vested interests involved and the dangers that truly solving the issues would bring to those interests.
Next up is the question of the bonuses themselves. The idea of ‘compensating’ workers is a standard one in a market based economy. Compensation in a free market economy should fairly recompense workers for their contribution towards the profitability of an enterprise and the creation of shareholder value. And the market should decide what ‘fair’ actually is. If someone delivers on their side of the bargain, then proportionate compensation is earned. All sounds good so far. However, research of banking stock prices, will generally show that often the bankers rewards are often disproportionately large compared to those of shareholders who own the business, making the drivers for compensation resemble a cartel like controlled environment, rather than a free market. What about when that bank makes these huge losses (felt by the shareholders not the bankers) to compound the issue? As is often the case, many of the bankers whose actions lit the touch paper that caused a chain of events were removed from their jobs by the market and some of the more nefarious products they traded met the same fate. New actors have taken to the stage in this unfolding melodrama. In the example of Stephen Hester’s bonus recently, he didn’t cause RBS to make the largest UK corporate loss in history; he was brought in after the fact to clear the mess up – which needs to happen if UK taxpayers are ever to see their money back from the bail-out. His target based compensation for achieving certain milestones (agreed by the board, share holders and the government) was designed to incentivise someone with the best skills for the job and hired in the free market. For media led public fury to then lead him to decline his bonus makes no sense if we focus on the long term objective of turning the bank around and getting our money back. Not to mention the RBS’ ability to hire the best talent in the open market.
Essentially if we are have an effective free market economy; all sections of that economy should be open to the rewards and ravages of that market, without exception. If an enterprise does well both shareholders and employees should see proportionate rewards and if not, then both should feel the pain. And if it does so badly that it fails, then it should be allowed to fail, unleashing the power of the market – creative destruction – which clears out the old and allows new better businesses to be created. Cronyism in its various guises including bail-outs and rewarding board members for failure with huge payouts and overblown pension pots cannot be the way forward. If we are to actually live in a capitalist/market based economy then the free market needs to be allowed to operate in an unfettered way and the chips be allowed to fall where they may. So perhaps we should be asking questions about the root causes of imbalances in the market, including the role of central banks and governments and of undue influence exercised over these bodies, rather than purely focusing on the ‘symptoms’ of the bonuses themselves.