Bankers’ bonuses: the fish stinks from the head

February 16, 2010

copelandlLaurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. –

The awful thing about lynch mobs is they so often hang an innocent man, leaving the guilty totally untouched.  In the case of the banks, the danger is acute.  As I have already argued, hedge funds and private equity are being unfairly targeted, especially in Europe. But there is another, even less popular class which is likely to end up in the firing line, for no good reason and with consequences which could be damaging for all of us.

Broadly speaking, the banks pay 6- and 7-figure bonuses to two quite different sorts of people. First, there is a layer of what we might call technocrats: the striped-shirted traders of legend, with their loud voices and even louder dress codes, along with the managers who try to control them, the quants who invent complex trading strategies and price exotic new instruments, and a variety of others with specialised skills. Since they are rewarded in proportion to the profit they generate for their employer, which can usually be measured with considerable accuracy, their bonuses are often very large indeed. The question is: should we treat these professionals who trade on their expertise and who heavily outnumber senior management in the same way as their bosses? Not as far as I can see.

However unpopular these market professionals might be, I can see no reason whatever for intervening to limit the rewards their expertise earns for them. Arguments about “justice”, “fairness” and “ethics” are irrelevant, especially when they rely on judgements about lifestyles.

Fairness is no criterion for determining pay scales, unless we are also willing to limit the earnings of rock stars, footballers, best-selling novelists…..that is the way to the madhouse (and the collective farm).  The market sets a high price on rare skills, and in a competitive world, any attempt by a single country to restrict that price will result in it losing those skills and the business that goes with them.

No, anger about bank pay levels ought to be directed exclusively at senior management, where the key decisions which brought down the banking system were taken. Merging high street banks with investment banks, securitising mortgages so as to expand balance sheets by borrowing in wholesale markets instead of relying on deposits for funding, leveraging up to and a long way beyond the prudential limit, relentless empire-building that turned Citibank, RBS, HBOS into monsters with balance sheets on the scale of middle-ranking UN member countries – all these catastrophic decisions emanated from the boardroom, not the trading floor. The guilty men were handsomely rewarded for running their banks on to the rocks and, just to add insult to injury, are in most cases now extracting large rewards for salvaging the wreckage! This is the problem, and in my view the only problem, with bank bonuses.

Even before the crisis, it was hard to justify the rewards they earned. Their marketable skills are not always apparent, since they are not always professional bankers themselves –some have spent most of their careers in other industries. It is extremely difficult to measure their contribution to profit, which is precisely why their remuneration packages often involved options with payoff patterns based on highly controversial computations of how well the bank’s shares perform. If their remuneration packages looked over-generous before the crisis, they must be totally indefensible now “après le deluge”.  Can anybody seriously believe that paying more modest salaries would have resulted in even worse mismanagement?

Would lower-paid managers really have lost more money than those who were actually in charge of the banking system when it capsized? It seems to me there are only two rational responses to being told that, unless they are adequately rewarded, bank chiefs will take their talents elsewhere. First, to ask: where is “elsewhere”? Second, as tax payers, we should consider paying their fare. There can only ever be a handful of global banks, and while I can well imagine a mass exodus of the striped-shirt brigade to Zurich, Hong Kong or Shanghai, it is hard to imagine many of our top bankers finding comparably-paid jobs in these places, where boardroom pay tends in any case to be far lower.

Bank mismanagement has inflicted titanic losses on two groups of people: taxpayers (overwhelmingly) who had to bail out the banks, and, to a far lesser extent, unsecured lenders and shareholders. In order to minimise the risk of this ever happening again, the former should be protected simply by breaking up the banks, so that even the largest can be allowed to fail and none is ever again in a position to hold the world’s governments to ransom. Smaller (and more numerous) banks would in any case pay their CEO’s proportionately less.

As far as shareholders are concerned, everything possible should be done to improve the quality of corporate governance. Greater shareholder activism might possibly have forced senior management to deleverage before it was too late and maybe also to reduce  inflated executive pay, and if not, then at least shareholders could have had fewer grounds for complaint when they were subsequently wiped out.

Tobin taxes, limits on bank bonuses, even Glass-Steagall Mark 2 are diversions, welcomed by the banks with just enough cries of anguish to make their suffering seem real enough to appease an angry public. In reality, they are all feeble alternatives to the dismemberment the bankers really fear. In the meantime, a suggestion for Alistair Darling about how to reduce the bonuses in Britain’s state-owned banking giants: just pick up the phone and give the order. We own them, remember? Yet we appear to have the worst of both worlds: our banks are nationalised, but we have no control over them.


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I agree with most of this, but where is the punishment (apart from potentially being fired) when a trader legitimately loses vast sums of money. Are previous bonues clawed back, do they end up owing the bank money? No. The model still encourages huge risk taking without the potential to lose anything other than their job.

Posted by scoops | Report as abusive

Absolutely correct.
It is not the PhD “money makers” ,who work hard from 7am to 7pm or later, who should be punished.
Rather, punish the MBA “executive directors”(who stroll in at 9.30, go to big boozy lunches and leave the bank in a poorer state at –

Posted by A Genuine Risk Manager | Report as abusive

Whilst agree with most of Prof Copleand analysis I don’t think he’s right about the tarders et al. Their massive bonuses are gained by taking disproportinate risks with someone else’s money. If their bet (and that’s all it is) is correct they rake it in for them selves and their bank. If they are wrong, they move on to the next deal to make up. They would not underatke these risks with their own money. They effectively have a win-win scenario no matter what happens. This then continues to encourage risky practices and..well you know the rest of the story. All the bonuses structures in the financial sector are simply absurd and need fixing at all levels not just the top.

Posted by Gurinder | Report as abusive

Excellent analysis and prescient conclusion by Prof. Copeland.
Needless to say, all will be ignored.

Posted by cognitivedissonance | Report as abusive

Does our government’s refusal to regulate or ‘punish’ derive from the ambitions of some, around and like Gordon Brown, with an eye to other possible post-election careers, even in finance? Is Darling yet another gamekeeper prepared to consider poaching? They both seem determined to maintain that ‘light-touch’ as regards regulation of finance …

Posted by D Thomas. | Report as abusive

But the biggest problem is with the Government who effectively wiped out any proper regulation of the banks allowing them to behave outrageously and then go to the tax payer with their heads temporarily bowed when it all went horribly wrong. And even now we’ve all experienced the damage they’ve (senior bankers) done, the Government does nothing to protect the public but much to further protect the banks. Could the reason for this be similar to the current Greek tragedy? Have there possibly been some unusual derivatives and futures deals done that the Government don’t want us to know about and which will fail spectacularly if the banks and especially the Scottish banks, go down? Either this Government is genuinely incompetent and impotent or there is an element of blackmail in their relationship with the banks. There must be or else the likes of Fred The Shred and Peter Cummings would be facing prosecution for bankrupting the entire nation, instead of facing luxury lifestyles and massive pension pots. Either way the tax payer is the loser.

Posted by Nikki Turner | Report as abusive

To Scoops:
Losing your job for excessive losses is permanent and finding similar employment may be a little difficult(remember the old boy network, references..etc).

To Gurinder:
Actually most traders do trade with their own money….sometimes successfully, sometimes not.
And why punish ALL bank workers? I for one am a risk manager & I try to limits exposure –

Posted by A Genuine Risk Manager | Report as abusive

I agree that rewarding anyone regardless of your job for doing a good job is essential for moral within the work place.

But when you hear of stories in today market or high street banks and major players in the finacial market paying our over £2 billion in bonuses when the tax payer has had to bail them out, I find myself feeling extremely frustrated that the people who caused the recession are still being rewarded for their failure in their jobs.

I thought rewards where exactly that. If you do a good job, you get a reward…..not if you do a bad…no terrible job.

Basically I believe that no bankers who work for an organisation who have been bailed out by the government can justify bonuses of ANY amount.

Posted by Paul | Report as abusive

There is a third class of victim Prof Copeland doesn’t mention – everyone who has suffered from the economic downturn because the banks shut down their core activity.

I can’t accept that “Arguments about “justice”, “fairness” and “ethics” are irrelevant”, however I do agree with the solution of introducing real competition amongst banks for the core business of taking in deposits and redistributing them to borrowers. However I can see no reason why hedge funds shouldn’t carry on redistributing wealth from the really wealthy to the nouveau riche.

Arguing about how the huge profits should be divvied up is solving the wrong problem, the problem is that they are making huge profits at all by having such a cosy club of competitors.

As Prof John Kay pointed out recently on the Money Programme, no net money flows into the financial community from derivatives and futures (they are essentially betting among themselves). In good times it all comes out of our pensions and investments – in bad times add our taxes to the list. It is a truth universally acknowledged that monopolies are highly profitable and become bloated and inefficient – the solution is competition.

The US government broke up Standard Oil and Bell Telephone – will Obama have the bottle to break up the banks? Will HMG follow?

Posted by Steve Marshall | Report as abusive

If a trader loses the bank huge sums, they get fired or get no bono! They don’t pay traders who make huge losses get that straight – it’s hire ’em and fire ’em. I have witnessed it first hand!

Posted by Dealer | Report as abusive

The most clear cut analysis and sensible recommendations I have seen.Pick up the phone Alistair!!!!

Posted by K Butler | Report as abusive

Prof Copeland is absolutely correct in his analysis in my view. If the managers over the traders are not able to profit from risky bet taking they will put limits in place to prevent it. This will reduce the risk to the tax payer and ultimately also reduce bonus payments to the traders who are unable to make huge profits (or losses).

Posted by Andrew | Report as abusive

If I were UK PLC I’d simply withdraw passport from ALL bank personnel on over £20,000/yr, freeze wages, NO bonuses and no ability to move job. They are all in open prison, work to repay the debt they owe with interest @ 15% like everybody else has to pay until they have repaid in full.

Any slackers who take sickies don’t get paid unless they are genuinely ill.

Bank base rate at CPI+2%, savers to be rewarded…

Abolish tax on savings interest for anybody on less than £100,000/yr, they don’t earn enough to make any worthwhile interest.

Posted by Steve | Report as abusive

And there’s me thinking you simply got some taypayer money and told never mind – just try again – you’ll have better luck next time…! Oh yes and you’ll get an even bigger bonus next year…

Posted by C | Report as abusive

banks, they stink from top to bottom.Our politicians are exactly the same is this why the banks were bailed out ? Which other business would have received the same level of rescue ? answer nil
The only sure fire way to restrict the outrageous payments made to these individuals is to dismantle the large banks ensure more competition and ensure we have strict and accountable financial practises in place.At the moment i believe along with many others we are simply storing up the next crash in years to come as clearly the banks have learned nothing,why should they within months of the mess thbey created they are back to the same old ways. weak useles FSA and others

Posted by L Marston | Report as abusive

[…] Read More … ) Tags: Balance Sheets, Banking System, Blogs, Fish, Investment Banks, Money, Mortgages, Reuters, […]

Posted by Bankers’ bonuses: the fish stinks from the head – Reuters Blogs » More, Read, Would, Merging » Mortgage News Today | Report as abusive

Indeed they can and do get fired, but if you go to a casino (which is what the city is) and play say, roulette for a friend (‘cos your a roulette ace ) using their money which you get 10% percent of the winnings, you may win £1,000,000 on the first few spins, trousering £100,000 each time decide it’s all going rather well, whack the whole lot on and lose. After all what do you care you’ve trousered £500,000 and lost all your friends money. That’s how it works, except traders don’t have any friends :)

Posted by scoops | Report as abusive

All countries need successful profit making businesses to generate wealth and employment. For our country having a regional sector dominance in an industry benefits not only the organisations themselves but also by means of bonuses benefits large numbers individuals who participate, according to how successful their particular group has been. The wealth created trickles down to the national economy, as do the taxes paid (though it must be admitted there is at present large-scale tax avoidance).
The sector has proved itself capable of maintaining huge margins through the recession, while manufacturing industries have suffered in countries like Germany and Japan. Recent job losses have shown that failure to perform is NOT rewarded, indeed these individuals may never find employment again. So if the Somali government does not take a firm stand against international attempts to impose international regulation on collateralised hostage swaps, we may find that we lose these talented individuals to Yemen or Djibouti. Piracy is after all an international business.

Posted by Steve Marshall | Report as abusive

What makes bankers expertise more important than the collective farmers?

Studying stealing ain’t no better than studying seeds so stop trying to squirm out of being labelled greedy you greedy lot.

And get learning about seeds. With all the sovereign collapses you’re about to cause, you will need that knowledge far more in the future.

Posted by Paul | Report as abusive

This is exactly the kind of thing that makes business stink.
Think about this for a moment. On the one hand corporations have the right to a voice in congress because they are recognized as people.

But on the other hand when they do something like cause the near collapse of the whole financial system, all of a sudden we need to think about who we punish. AIG, BOA, Merryl Lynch, etc… are citizens of the United States. And for banks not under US ownership there are associations that lobby on behalf of the industry.

Those “people” screwed up, and so it only makes sense that those “people” be treated as individuals in their entirety. Following the logic of this article’s argument is like saying that maybe I did steal from you, but that doesn’t mean my hands should pay the price. Prosecute my head instead. My hands are just skilled at picking things up and manipulating them under the direction of my head. Don’t throw me in jail. But it wasn’t my head it was my brain. So it’s my brain you need to put in jail. My head just takes in information. But wait! Don’t throw my brain in jail, it’s only part of my brain that’s responsible for making those choices etc…

Corporate personhood hides accountability. They should not have the right to voice opinions in government. Corporations do not deserve a lobby. Corporate citizenship must be struck down in the courts. As long as they are considered people, they can never truly be held accountable for their misdeeds. But their rights will continue to allow them to trample over the citizenry until those rights are revoked.

Posted by Benny Acosta | Report as abusive