What You Should Know About Banker Bonuses

Published in Investing on 15 January 2010

Huge profits have been handed out a platter, so why do bankers deserve their massive bonuses?

You'll be hearing a lot about banker bonuses in the coming weeks. Big banks will officially report "the number," or the average total compensation per employee for 2009.

How much money are we talking about? In the US, at trading banks Goldman Sachs and Morgan Stanley, this number could be ridiculous -- perhaps $700,000 per employee.

It won't be as shocking at commercial banks like HSBC (LSE: HSBA) and Royal Bank of Scotland (LSE: RBS) because the total workforce is substantially larger, made up of tens of thousands of lower paid tellers and back-office staff. In either case, average compensation masks that a few traders, executives, and department heads can make tens of millions. There's a good amount of skewing here.

For Goldman and Morgan Stanley, here are a few numbers to chew on:

Goldman Sachs

Earnings per Share$4.47$24.73$19.69

Sources: Company filings, author's calculations.

Morgan Stanley

Earnings per Share$1.45$2.98$7.07

Sources: Company filings, author's calculations.

In all likelihood, 2009's compensation will eclipse 2007's record. That makes people want to scream. That bankers get record pay a year after essentially failing and being saved by taxpayers seems completely absurd. And it is.

Here's my view

Prior to joining The Motley Fool, I did brief (thankfully) stints in investment banking and private equity. This was 2006-2007, when cheap money bubbled out of the drinking fountains.

At the investment bank, compensation for mid-to-upper level employees was based on deal volume generated. If you put together a $50 million merger, add that to your scorecard. Same with private equity. Yearly compensation was typically based on the size of companies purchased. If you helped acquire a $100 million business, add it to your scorecard.

In both cases, you ate what you killed. Employees were paid for performance. This is the argument bankers use to defend their pay: "Yes, we make ungodly amounts of money, but we earn it. Capitalism, my friends."

The problem with this argument is that it doesn't consider what percentage of the "scorecard" comes from bankers' skill and hard work versus factors outside their control, like monetary policy and favourable regulations.

Here's an example: 2006 and 2007 were golden years at the private equity firm. You could finance anything -- anything -- you wanted at ridiculously low interest rates. So-called "deal flow" was endless. Many, many large acquisitions were made, and record compensation followed accordingly.

But were employees earning this pay due to superior intelligence and sophisticated market insight? Ha … ha … ha. Hardly. They were riding a speculative wave of cheap money largely engineered by the Bank of England and Federal Reserve. A large portion of pay was based on factors they had nothing to do with.

This isn't to say bankers aren't hardworking people. There's truth to the saying, "If you don't show up on Saturday, don't bother coming back on Sunday."

But solely attributing their stupendous pay to hard work and skill is fantasy. One columnist recently opined that those decrying banker bonuses "rarely have the numerical skills necessary to put together mergers and trades."

Maybe so. But do all bankers themselves have these skills? How about the highly paid mortgage traders whose 2005 models didn't even allow the possibility of declining property prices? We can debate whether that took "skill." In many cases, they were simply in the right place at the right time.

That brings us to 2009

Over the past year, substantially all investment banking profits have come from fixed-income trading. Moreover, nearly every bank's earnings came from this segment, not just a smart few.

This happened for one of two reasons: (a) Every fixed-income trader suddenly woke up in early 2009 with newfound brilliance; or (b) they're riding the largest wave of cheap money in history, financed by central banks lending money at 0% that traders then use to buy ultra-safe government securities yielding 2%-4%. Guess which one.

Furthermore, Bear Stearns and Lehman Brothers were allowed to die while others seemed chosen at random to be saved, eroding competition for the lucky survivors.

How are these factors -- all completely outside bankers' control -- accounted for when determining compensation? They aren't.

That's what's really infuriating about banker pay. It isn't that they're earning mountains of money. It's that they're earning mountains of money based on factors they had nothing to do with.

Other companies that employ equally intelligent and driven workers -- Unilever (LSE: ULVR), Diaego (LSE: DGE), BG Group (LSE: BG) -- never see that kind of advantage. The success of banking, more so than any other industry, is based on privilege rather than performance.

What do you think? As always, share your thoughts in the comments section below...

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> A version of this article was published originally on Fool.com. It has been updated by Bruce Jackson.

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Terrapin1 15 Jan 2010 , 9:50am

They were animals they had no idea how to price risk- even at the most basic level
Their 'genius' comes from insider trading and market manipulation.
Deal making is a separate issue and yes that requires a lot of skill and smarts, but plain trading -they bought off the ratings agencies, and took money from all and sundry, one big Ponzi scheme- but here's the clever thing- they have been given a massive 4+$trillion, like a gambler at the casino they are being refinanced to 'have another go'
I cannot respect traders who knew how much money they would be getting, in order to buy the market back in March. A great many good traders have been hurt by the rise, we all saw the drop-it was called a 'dose of reality' yet again we are aloft on myth, hot air and more lies than ever as governments have to do as they are told.
when the money supply reaches critical mass and we crash again will the banksters have to pay back a single penny?

supasap 15 Jan 2010 , 10:17am

ok so I ask the question once again ...... is the rewarding of bankers an example of excessive economic "rent" ie are we paying them way above the market rate? could most professional people ie those earning between £30k and 70k actually do their job in a way that no-one would notice the difference? if this is the case why? there are not other examples of a whole sector enjoying this irrational benevolence from their employers who are still incentivised to maximise profits and thereby minimise renumeration. There are a few celebrities who are over-rewarded arguably but that is a function of our celebrity obsessed culture. I don't believe footballers are over rewarded because to me that is a perfect market where every football manager would like to have say Didier Drogba on their books if they could afford it and then drop him immediately if he was injured beyond repair, a ruthless but perfectly functioning labour market...... anyone who plays football can see how he is amongst the best. Now back to bankers, is this market ridiculously distorted and if so can we send in someone from TMF to blag it for a while to prove it? or is it what we seem to reluctant to admit that it is another perfect market and they possess skills which we normal mortals don't.

LateDeveloper 15 Jan 2010 , 10:37am

If bonuses were actually paid on profits alone, then i doubt if these retards would get paid anything.
Money that the Government put into the Banks , should be calculated as a deficit, not to add to the banks pockets to hand out as bonuses.
In future maybe we should let these banks go to the wall, or better still get an agreement out of them that money owed by the bank is repaid, before they can hand out any nice big bonuses.

If you owed the banks money, then told them that you deserve that fancy new car before giving them any money, what do you think their answer would be. ?

tats2611 15 Jan 2010 , 10:47am

Great stuff - a refreshing original take on a subject which seems to be dragging on - I totally agree, as I'm sure most City workers would do, off the record! I can say that,as a once stupidly overpaid ex-fund manager! The personal contribution which each individual makes of course varies between different jobs and institutions but only a very few deluded people really believe they're indispensable! The fact is they pay as little as they can to keep you from going to the competition! And everybody does that! I wish I had a solution, but bashing individual bankers is never going to work!

SiGl26 15 Jan 2010 , 10:54am

Well Terrapin - even animals know how to price risk; they won't pick a fight with the alpha-male unless there's a good chance of winning [and they'll accept defeat and retire hurt rather than go down fighting]. We need more animals in the City!

The essential 'skill' in City trading seems to be this willingness to take huge risks, with other people's money. Most current 'trading' is just gambling; the funds moved around no longer go to real investment in productive business.

The other 'skill' the City bought was that of undoubtedly brilliant mathematicians who invented all the dodgy investment vehicles, so complex that they bamboozled the buyers [and rating agencies] so they couldn't see the risk. No accident that many of Enron's former high-flyers found employment with investment banks.

I think the average numerate graduate could quickly grasp the principles of trading and do just as good a job of following the herd as most of the current over-rewarded incumbents

Fool155781344 15 Jan 2010 , 10:58am

I've no real understanding of what bankers do and even less of how derivatives work but I suspect that the root of the problem with the banking system doesn't really require us to have much of a grasp of these esoteric subjects. I suspect that the root of the problem is relatively simple. If you have a system where the 'decision makers' at the very top know that they can make enough money in a few years to live in considerable luxury for the rest of their lives no matter HOW risky their decisions may turn out to be for others THEN THAT"S WHAT THEY'LL DO! I don't imagine they're evil but they are greedy and they operate in a subculture where their behaviour is the norm and where their self worth is only maintained by being surrounded by people who reassure them that they really are pretty damn fabulous for making all that money as opposed to an alternative view that they are simply greedy and parasitic upon the rest of society

redndead 15 Jan 2010 , 11:13am

Looking at the figures at the top of the article, I can think of no other industry where a salary rate of 50% of revenue (and is that revenue or profit?) could ever be seen as acceptable.

With the connivance and backing of bankers, manufacturing in this country has been moved abroad to reduce unit costs. We now have the situation where our industrial base is now so low that banking services can now effectively write themselves a blank cheque cause they are the only game in town.

Bankers add no value whatsoever to normal life - they facilitate deals that destroy jobs, enriching themselves on the bodies of the fallen. They are the ultimate parasitic life form.

Fool18495920 15 Jan 2010 , 11:17am

What many bankers seem to lose sight of is that a bonus is just that, a bonus. It isn't part of your salary, it is something extra, and, like Christmas presents, shouldn't be expected.

LateDeveloper 15 Jan 2010 , 11:24am

I would like to add to my above statement, with this.

Fantasy Scenario (since the Banks would not do this in the first place)
A Bank funds a company for say 70% of the Business, to stop it from being liquidated, then those with a 30% stake in the company decide to pay themselves nice bug fat bonuses.
What do you think the funding Bank would have to say about it ?

There is a disclaimer when buying shares in any company, shares prices may fall so you could either take a loss or wipe out your shares entirely.
Anyone remember the fiasco with Lloyds and its investors taking a hit, then crying about it, these bankers need to learn the facts of life and take it, just like any other share holder.

LINDESAY 15 Jan 2010 , 11:30am

You can't change the weather by holding back the barometer. Bonuses are just a symptom of the underlying problem, which is that banks and bankers have too much power. This is a political issue that governments internationally have to tackle; one wonders why they seem so reluctant to take them on in a way that would make a difference...

MarkeTears 15 Jan 2010 , 11:46am

Can you get your article and all the comments onto the intranet sites of all the banks so that they can see how their greed is viewed by the rest of us?

eightzero 15 Jan 2010 , 11:55am

Puzzled!! The one thing that I have seen no comment over is where these profits come from. I assume the banks are not printing the money (although I know there may be some doubt over that !!!!). I assume it is because some customer somewhere is paying the banks to do a job. If as I and most folks suspect bankers are just ordinary slightly above average intellect folks who managed to get a job in banking, then the issue has to be that they are charging too much for their services and there is a form of cartel operating that keeps charges at a really high level. ( I do note that all the regulation bodies do seem somewhat stuffed with bankers)

If governments regulated the charges and hence forced the price for these services down. No point the bankers vanishing off shore as the customers would flock to the cheapest location. Bonuses would dwindle and we get back to the land of the sane. When their customers realise they were indeed being ripped off the requirement for government legislation would disappear.

Would this work

Fool926437394 15 Jan 2010 , 12:01pm

Let the banks pay their people whatever they want.

Obama's got it right, re taxpayers getting repaid their rescue money. Time is NOW for the UK and European finance ministers to co-ordinate policy with the USA, and make sure that the banking corporations repay the loans/ re-finance the investments made by taxpayers.

Once there is an internationally agreed fiscal "drag" on their revenues, the banks will adjust rewards to employees because of "market forces".

Will they relocate as a result? Where to? Zurich, Geneva, Shanghai?
In their dreams!

The "Masters of the Universe" might care to recall that the most powerful mediaeval banking consortium in Europe came to an untimely end when they seriously annoyed the King of France. Nobody else in Europe stepped in to save them. They were the Order of the Templars.

Dhahran2001 15 Jan 2010 , 12:04pm

The government controls banking licenses, that gives them a lever. It should be used to force banks to disintegrate - divide to the point that each part is 'small enough to fail'. Government should not be in the business of propping up anyone.

GrayDragon 15 Jan 2010 , 12:04pm

Is it really just as hard to put together a $100Million deal as two $50Million dollar deals? Does the bank make the same profit? I doubt it. Thus the method of calculating the reward needs to be reviewed.

The current system appears as nothing more than a scheme for rewarding those placed in the positions to manage the big deals.

spudnlike 15 Jan 2010 , 12:09pm

I work in the consumer Electronics industry. We have bonus related to how the company is doing, and how we did as individuals. But if the company fails to meet its targets then this multiplies our individual bonus by zero. If the Company performs poorly (and I think being baled out by the very people who's pensions you have just destroyed, counts as poor) then I get nothing.

They messed up big time, and wiped out many people's financial security. They should NOT get a bonus.

The lack of bonus is probably the ONLY thing that would make them think about the consequences of their actions.

chrisjej 15 Jan 2010 , 12:14pm

Whilst I would agree with the basic fairness argument, I feel like the article fails to address the real issue - what can actually be done about this.

As we have seen, the UK plan to introduce a targetted 50% tax has met with the immediate threat of businesses moving offshore. Given that certain countries are more than willing to take them in, one can't help but wonder if the problem is deeply entrenched in the system.

In principal, one would hope competition would erode some of the excess profits - but in practice this hasn't happened for a variety of reasons.

The other question is: while we are all feeling decidely short changed by the banking system, how many of us would willingly turn down such a bonus if it came our way?

wylecop 15 Jan 2010 , 12:14pm

lINDESAY IS RIGHT THAT IT NEEDS INTERNATIONAL ACTION to rein in these ridiculous bonuses, that the bankers defend by saying staff would move to the competition.

What both our & the American governments should have done as part of the 'bail outs', was to require the banks to repay 50% of their annual profits (pre bonuses) until the 'bail out' debt,( plus interest at the B of E or Federal banks respective rates) was totally repaid.

LARFIELD 15 Jan 2010 , 12:27pm

Come on you bankers, take a break from calculating your annual bonus 'entitlements' just for a moment & let's hear your opinion on the slightly critical views expressed here...

trouts 15 Jan 2010 , 1:17pm

A big problem as I understand it is that banks reserves couldn't cope with the crisis, so how about they can continue to pay bonuses to their hard working and precious staff, but they are forced to match the sum and add it to their reserves in perpetuity (on top of what the finanical regulations say the must have). A few good years of bonuses and they'll have sufficient reserves to cope with the next turmoil they engineer.

guykguard 15 Jan 2010 , 1:17pm

If bankers are so clever and so rare, how come there are so many of them? Who honestly believes that they're so much smarter or useful than anyone else that some of them earn about sixty times the State pension? Who honestly believes that it would make a jot of difference to human welfare if they did all leave to work in New York or Zurich?
I'm confident I could teach an intelligent, well motivated school leaver with A level maths how to become a competent bank employee in about six months. Been done countless times! Those who had left for Zurich or werever would be replaced in no time.
To become a competent banker takes a lifetime: judged by the banks' jaw-dropping incompetence over the last 18 months, there are very few real bankers around any more, just loads of bank employees who think they're bankers. And they simply don't get it, even now!

Slasto 15 Jan 2010 , 1:35pm

Employees in the car business get good deals on cars.

Employees in the supermarket business get good deals on groceries etc.

Employees in the airline business get free / reduced rate air tickets.

The list goes on.

The point is, employees in the money business get money as their kick-off. Whether it's fair or not, and the scale of the reward, is a different issue...but nevertheless that's the way the world works.

Emloof 15 Jan 2010 , 1:53pm

What we see with bankers' pay & bonuses is only a reflection of the system we live in. In my mind the question is not one of compensation for any particular profession, but with a capitalist mindset, that - let's be honest - runs deep in nearly all of us. Hands up who would refuse a large bonus (say 100% of their annual pay) tomorrow, were they offered one? Or who would not consider changing employer, if they could get that bonus there?

So is it perhaps just envy? If you think you could (and would want to) do bankers' jobs, what keeps you?

Mostly everybody takes what they can get. And what they can get from employer A is determined by what they could get if they moved to employer B. It's called a market. And it's not limited to the financial industry!

Assuming there is something wrong with this, then this is a fundamental issue that should be reflected and discussed, and that might lead to fundamental change in the way the system works. Such discussion should include everyone's compensation(ie celebrities, footballers, consultants, politicians, plumbers, etc.)

More likely though, the majority of people will not want to make any such dramatic changes, as most agree there is no better system out there than the capitalist one. And for it to work, a free market is a pre-condition.

In any case, I would welcome such discussion. It would be refreshing and constructive, and a positive change from the banker-bashing we so seem to enjoy...

TamPudden 15 Jan 2010 , 1:59pm

Guys, this is OUR money. The solution is to vote with your feet. Why should fund managers et al get bonuses when they are doing, on average, the same as FTSE? So review all your personal pension schemes. Transfer your funds into a SIPP where you can then invest in a low cost FTSE tracker fund. If you are in a company scheme, ask the trustees why they are not doing the same.

The solution is simple - take your money away from them!

Fool219546985 15 Jan 2010 , 2:17pm

If only people would take the time to find out the truth and facts...

It is not money it is fiat currency, it has no real value in the sense of it is not attached to gold or silver etc...

The value of currency is because of everyones labour/toil, without the people giving their time to labour and toil it would be worthless.

E.G: If the farmer did not plough and seed the fields, if the builder did not build the properties, if the painter did not paint there would not be in value in the currency.

So, if the bankers were the only ones to work, what would they create physically.... nothing, which in turn would be no benefit to mankind.

Logically it follows through that the financiers etc must be creaming the top of of every working mans labour. a case of 1 for us and 9 for them.

Banking is legalised fraud, now someone may like to reply back to this comment and make all manner of unsubstantiated claims based on no facts and attempt to make my comment conspiratorial etc... so if thats the case fine but for those out there that really would like to check the facts out google "freeman on the land".

houghtie 15 Jan 2010 , 3:00pm

ljtherock, rm ieterstiung comment on fiat currencies. So what real valu does gold have, it doesn't pay interest and in fact needs to ne paid for to be stored (excepting some people make money from loaning gold). Its only got perceived as per fiat currencies. It does make a great speculative punt though.

What rubbish about banking! Its a simple industy, you give em money they lend it out for a larger sum. Its as simpolle as that for banks like the co-op bank. Where's the fraud? Poor regulation is another thing!

I think the galling thing about the bonuses is actually the fact that if the banks hadn't paid out so many earlier profits (or so called prifits) in the boom years, they wouldn't have had so many problems in the crisis.

There are parralels here to UK gov spending during the boom years.

There should have been better strings attached to bail out money in the US.

Atleast (I hope) the UK will have the courage to break up RBS now and possibly Lloyds.

supersol42 15 Jan 2010 , 3:03pm

One marginal benefit of these levels of pay is the tax and NI which is generated thereby.

And anyone can seek to be an investment banker...as for me, I prefer a less frenetic way of life.

Kickero 15 Jan 2010 , 3:04pm

This sort of nonsense just reminds me how lucky I am to be out of the rat race!

Hey I feel sorry for most of these bankers. Sure they get big bonuses but what is their life like?

To be frank, you'd have to pay me more...

To those bankers that love their job and get paid really well for it, god bless you, you must be nuts!

I'm very glad I dont have to eat what I kill or spend 13 hours a day watching 8 screens desperate for a wee!

To those of you that are fuming at these stories, take time out to look at yourself and why on earth it makes you feel so mad. Then change your mind because you won't change the perverse hedgemonic alliance that is politics and banking!

cheekyknight 15 Jan 2010 , 3:26pm

Bankers/brokers play at a casino, usually bankrolled with their clients money. This time they wiped out their clients and took the house down with them.
Now you want a bonus cuz you're on a winning streak. Cool. How about a fee commensurate to the impact you had on the public. I'll have the keys to your house and your porshe now, if you please.

chaz25 15 Jan 2010 , 3:49pm

I challenge any banker to go teach a difficult class in any poorer area of the UK and last out just one lesson!

Teachers in very many areas risk losing their job EVERY time they walk into a classroom.

As for skills, the performance of bankers varies very very widely. VERY FEW manage top returns on investments. Most manage mediocre or extremely poor returns.

Whys should any except the VERY FEW getting absolute tops market returns get ANY bonus.

I think most bankers should have PAY DEDUCTIONS for POOR or VERY POOR performance!

dun4928 15 Jan 2010 , 4:02pm

I suspect like the majority who read these posts I am a believer in Capitalism which together with our "liberal democracy" has maintained the growth of the West. However our if beloved bankers who espouse the benefits of said capitalism were to trully experience the ramifications of it they would all have found themselves unemployed last year after their banks had gone bust and all talk of bonuses now would have been the stuff of fairytales.

supasap 15 Jan 2010 , 4:19pm

no one with the possible exception of Emloof has addressed my question...... why would any organisation consistently pay over the odds for an employee if their skill was widely held amongst the labour force....... it does not happen.... so either we say the banks are operating outside the normal pressure of business and markets and benevolently rewarding mediocrity...... and if you believe this then please offer an explanation why an organisation would behave in this way OR these bankers are getting paid what they are worth, a perspective which some of us seem to find so unpalatable and somehow less palatable than Katie Price / Jordan being worth far more than us run of the mill professionals...... if you don't like the market then campaign for a morally charged socialist economy or just accept the gross levels of inequality that the market creates, but how many of you above would even consider voting Labour let alone seizing ownership of the means of production... tutting at the Daily Mail or TMF headlines has its limits as a means of transforming the world

JugPenKettle 15 Jan 2010 , 5:43pm

I don't think that I really understand everything about what "bankers" do. But if they are responsible for this recession, and therefore for me losing my job - with all the hilarious financial stuff that goes with that, like no holiday, cheaper food, selling my car, fewer birthday presents, no treats for the children for a start - then they should share some of my pain. If they were being credited for beneficial market conditions in 2006/7 then surely they could be debited for the depressed economy now. An eye for an eye, a tooth for a tooth........


fooldiver1 15 Jan 2010 , 6:03pm

Skilled surgeons, emergency helicopter pilots and our armed forces people out in Afganistan deserve more than bankers. Bankers and most 'financial advisers' are so far up their own backsides that they think the world revolves around them, when in fact they produce absolutely nothing and just handle other people's wealth. In reality they are parasites and should be paid by the hour with a small bonus on top, totally less than £150,000 per year regardless. Time for them to come into the real world and I just hope that Gordon Brown (although I think the man is a total prat) hits bankers with extra tax so they have to pay everything back to the ordinary taxpayer.

wpannuitant 15 Jan 2010 , 6:18pm

The fact remains that if the banks are capable of making such vast amounts of money how come they got into a mess and had to be bailed out by us? What is their cash flow like? Are they making paper profits and paying it out as cash? If so where did they get the cash from? Why is all this anger coming only from the public? Why not more anger from the shareholders (institutions) and Govt? Any industry where value vastly exceeds cost - Petroeum, whiskey, beer and tobacco - the Govt. step in to cream off the excess. Why not banking? Oh! I forgot they would leave. So who would they run to next time? What a showing up would it not be if the Sage of Omaha had to go to Uncle Sam with the begging bowl. His cred would be gone for ever.

meanmachine1 15 Jan 2010 , 7:26pm

Being simple I just dont get it. If I had a business that went bust and then got a loan to tide it over, the business surely would not be considered profitable again untill the loan had been repaid.

Bring on the American way of life. Tax them.
Let them consider it as an insurance premium against going bust again.

margaretmac 15 Jan 2010 , 8:42pm

The bankers or parasites should come down to the real world, The will probably give some of their bonuses to the Haiti problem (if you believe that you would believe anything) the only people they will look after is themselves, their actions of the past decade show how shallow they are, what is mine is mine and what is yours is mine, we were always told pay your bills/debts before you spend anything on yourself, they should do the same, but their culture will not allow this

Fool474845552 15 Jan 2010 , 10:07pm

We are told that if they don't get their bonuses, the first-rate bankers we have now will go overseas.

Yes please. Some third-rate bankers here might be much better for the rest of us.

Cheapside 15 Jan 2010 , 10:48pm

SiGl26 makes a good point- I'd add they were on a one way bet. Win and they are quids in, lose and someone else pays. Where's the the incentive to the rational, prudent management of risk there?

thairet 16 Jan 2010 , 12:09am

Oddly enough ...NOT.., no comments from bankers!

bouleversee 16 Jan 2010 , 12:45am

There should be no bonuses whatsoever until the taxpayer has been fully repaid with appropriate interest AND the share price restored to pre-crunch level.

Of course people shouldn't have taken on mortgages they couldn't afford but some people aren't bright enough to work out what they can afford or are so desperate to get on the ladder they will take the risk. It's like offering sweeties to children. But the ones offering the mortgages should have the sense to work out what is affordable, with a reasonable risk margin. That's what they are paid to do. You shouldn't put sweeties under the noses of the diabetic.

As for being envious, certainly not. I'm far too thin skinned to accept a massive bonus if I'd been responsible for ruining so many other people's lives and I'd be far too worried about getting a knife between my shoulder blades. Actually, in these violent times, I am quite surprised that some embittered person who has lost job, house etc. hasn't already had a go at a banker. Sure, footballers and celebs are overpaid but nobody is compelled to buy a ticket or a book and they haven't been responsible for losing other people's money or forcing other people to cough up via taxes, so there is no valid comparison. It doesn't take great skill to make money if you are handed a large sum on a plate and lend it out at a higher rate than you are paying and there's no cost to you personally if it doesn't get paid back.

The bonuses to the lower echelons in the banks may not be all that large but since the rest of us are feeling the pinch, there's no reason why they shouldn't get squeezed too.Dividend income has dropped dramatically (none from banks), many people have lost jobs or have suffered paycuts or freezes. Why should bank staff fare any better? I simply don't understand how a bank can afford to pay bonuses if it cannot afford to pay a dividend. Doesn't it occur to them that the shareholders might also decide to move elsewhere? They didn't risk their capital in order to line the pockets of the employees and the amounts paid at the top are just ridiculous. Interesting how it's now called compensation. When I was working I was grateful to have a job; I didn't consider I had to be compensated for doing it.

NeilW 16 Jan 2010 , 3:03am

How about a bit of creative thinking?

Divide the amount lent to the bank by the public purse (plus compound interest) by the shares issued to the Treasury. That is then the value of a share for bouns purposes.

The bank must then purchase shares at that price from the Treasury and give them to the employee with the bonus.

Then they get to share in the losses as well as the profits, and the public purse gets its money back.

joannie96 16 Jan 2010 , 3:39am

Presumably bankers get paid a salary like everyone else. If that's fair for the job they do, they will take it; if not, they are free to seek work elsewhere. Why do they need a bonus for doing (badly!) what they are already paid to do?

houghtie 16 Jan 2010 , 11:42am

meanmachine1: if you had a company that was bailed out and that baulout was in the form of equity injection (e.g. the existing share holders had their stake diluted), then this has no affect what so ever on the profit. Additionally, if money is made available at a very low rate of interest (which is effectively what the BoE has done). Then its very easy to gear up profits on continued trade. Even if a loan is given, if the interest on loan that is less than earnings (after tax etc), then the company will make a profit.

Unfortunately banks are in the business of borrowing (for short periods) at short rates (which are currently low) and lending that money for long periods of time at long rates (that are much higher). They have also made mountains of money from debt issuance (the debt created by govs to deal with crisis and even buying that same debt back - QE).

Banks just need to be regulated better (which should include restricting renumeration, or atleast linking it directly to long term performance).

BTW I'm not a banker but there seems to be a lot of rubbish being talked. Banks and bankers are necessary for lots of commercial activity.

It would be a good idea to ring fence the payments system somehow and remove high risk takers access to deposits. Leave the risk takers to gamble with their own money (or loaned money). Institute proper limits on gearing of loans (e.g. no more 90% mortgages an easy one to understand for starters). Break up the larger institutions.

What needs to be avoided is financial firms (e.g. their employees) "rent seeking", see http://www.ft.com/cms/s/0/113092ee-ce2f-11de-a1ea-00144feabdc0.html.

LearsFool1 16 Jan 2010 , 12:57pm

I have read all the comments here and would say 99% all state and reflect the varying factors and views as to why this whole issues of bankers' bonuses (and if I may clarify the bonuses of the bailed) is such a huge political and economic issue that must be taken in hand and sorted to the satisfaction of the true innocent victims ie the UK taxpayer.

To the 1%, I'm going to try to answer your question, which is fundamentally flawed because you are trying to parody the banking/trading scenario with the rest of the western world's way of working (ie capitalism). Banking is either in capitalism or it's not. The whole point of the original article was to point out that banking succeeded simply because it was able to ride the wave that had been created by factors outside of its control.

When creating any product (and as we are reminded money is treated a commodity and is there to be traded by those who are not mere mortals) assessments are made on four main forces outside the businesses' control Political, Economic, Social and Technological (PEST). All businesess have to consider these forces because if they don't, and they fail, they have to seek their own way out of the problems they have made. They may turn to a bank for help. I don't know of any bank who doesn't then take a day to day interest in how their rescue plan is working. I know of many businesses who have managed to recover and start becoming solvent again only to be closed down by the bank simply because they were unable to pay the excessive interest charges. Yes that is capitalism yes we accept that, what the banking cohort have failed to observe is that the same rule applies to banks too. Traders may have individually made some money for their company which may go someway to helping out the company's recovery but if that company is under the eye of the creditor who has bailed them out, the creditor has the right to call the tune. I hope I have made this simple enough for you to understand.

Bank's have embraced the Technological force to improve its way of working, now it can feel the force from the fourth, the Social force. The country is hopping mad. We're all given an education, most A level achievers could do a trader's job. I would like to see a trader handle a medical job (no come to think of it I wouldn't the amount of deaths would be on epidemic proportions and they wouldn't care).

Houghtie is right, the regulation is poor.

timhgray 16 Jan 2010 , 1:14pm

I think the whole issue of bonuses in our society should be properly discussed. What worries me is the way that in certain professions, bonuses, often absurdly inflated, seem to be the norm, while in others there are no such things. Bankers all went to school - doubtless they had inspiring teachers, who set them on their career path, and gave them the skills to progress. Bankers lead a stressful life, we are told, and no doubt many of them have strokes and heart attacks and other illnesses. Then they rely on the skills of doctors and surgeons to keep them alive. And so one could go on. Why should the bankers receive large bonuses, when none of these other professions ever have any bonus at all? Or, to put it the other way round, why should anyone receive a bonus for doing the job for which they are paid? All of us are contracted in our work to do certain tasks, and we are paid a salary for doing that. 90% of workers never have or expect any bonus - why should just a very few groups of workers receive them? Does an inspiring teacher, or a skilful surgeon, not add an extra value above the basic competence expected? But they do not expect bonuses - they are just doing their jobs. So are bankers - just because their job is to make money, rather than save lives, does not imply any moral entitlement to extra money, just for doing what they are paid to do.

abrahamisaacs 16 Jan 2010 , 2:21pm

Great article by a journalist with inside knowledge - thanks very much. Another annoyance with the banking industry is that it is a closed shop. I work in finance and have done so for over 20 years. Yet because I come from sectors other than banking, every job or consulting application I make to a bank when I otherwise meet their criteria is turned down on the grounds that "you don't have banking sector experience." This is despite the fact I have often worked with banks on the customer side of the table. Having demonstrated their incompetence and brought the world economy to the edge of disaster I would have thought they would now look outside their own industry for fresh talent, but sadly they refuse to open the door.

supasap 16 Jan 2010 , 2:35pm

still no-one answering the question why would any institution pay employees more than they have to?

Fool152227432 16 Jan 2010 , 11:11pm

In my simplistic, man in the street view, surely a bank should exist only to:
1. make a profit for the benefit of their investors and shareholders.
2. have money available for loans and mortgages for sensible borrowers who can be seen not to default on repayments, helping to create businesses, employment and a healthy economy.
3. create a wealth fund for itself :
(a) To make money comfortably available for lending not beyond it’s means.
(b) To put money aside into assets and create ‘a rainy day fund’ in the same way we mere mortals are always being advised to do.
(c) To pay it’s management and employees purely a salary for doing the job of investing and handling money, putting that job into perspective as simply one like any other job, the difference is they don’t manufacture goods, they make profits. (They should be made to feel ‘lucky to have a job’ like millions of others have to).
(d) to have the option, subject to moral scrutiny and public opinion, to pay a modest fixed percentage of any net excess profits in annual bonuses to employees(scaled according to rank), only after the ‘good housekeeping’ measures in (a) (b) & (c) were covered. The remaining percentage of excess profits should then be ploughed back into the business for the good of borrowers investors and shareholders.

If banks behaved in this way and the whole international banking playing field was thus levelled, we might not be in the mess we’re in now. There should also be more transparency and accountability.

Capitalism is OK if it’s run sensibly and honestly; it would appear it hasn’t been with people like Alan Stanford, Enron and Bernard Madoff to add to the financial catastrophes and miseries.
In company with most other ‘ordinary’ people, I find it incredible that banks can be brought from the brink of collapse by government money derived from tax-payers, only for them to continue paying fabulous bonuses and behaving as though nothing had happened.
I hate this term ‘belonging to the taxpayer’, let’s face it, once the government has taken your money in taxes, it’s no longer yours for you to have any say in the matter! When British Railways was nationalised, how could it have ‘belonged to the taxpayer’ we all still had to pay through the nose for tickets!
Dick Turpin wore a mask for all to see whereas the banks wear an invisible mask made of high finance jargon designed to deceive us all into believing that these bonuses and vast pension payouts are justified. If the international banking playing field was levelled and their affairs were wholly transparent and above reproach (a bit Utopian I know!), then there would be nowhere else for these so-called ‘high flyers’(that we are told we can’t do without), to fly to should there be any insufficiency in their bonuses! Their self-made system has allowed them to corner this huge portion of the world’s money for far too long.

wpannuitant 17 Jan 2010 , 8:44pm

Why pay people more than you have to? It is the Nick Leeson effect. They said then if these guys are making good profits (real or fictitious?) no one cares. You're OK, I'm OK, Hey! we're all OK. So just bank the bonus and don't rock the boat.
In another type of enterprise there would be accountants, controllers, treasurers watching over things. Then you have the inside and outside auditors. Add to those the analysts in the brokers offices and what can go wrong?

Fool1351940448 17 Jan 2010 , 8:57pm

Why just bash the bankers - don't estate agents (resi and commercial) get large bonuses too? Were they nothing to do with the crash?

RockderktheGreat 18 Jan 2010 , 11:58am

Unlike the US, UK- based bonuses are to be taxed at 50%, aren't they? So we can rest assured that at least half of it is coming back to finance some MPs solar-powered bird bath.

Fool21886934 18 Jan 2010 , 12:19pm

"That's what's really infuriating about banker pay. It isn't that they're earning mountains of money. It's that they're earning mountains of money based on factors they had nothing to do with."


"That's what's really infuriating about banker pay. It isn't that they're earning mountains of money. It's that they're paid mountains of money based on factors they had nothing to do with."

Helpful distinction: earn vs paid. Would that it were more widely used.

"Why pay people more than you have to?"

Because, if you don't, your peers on your own remuneration committee won't pay you more than they have to.

supasap 18 Jan 2010 , 12:51pm

RFJJones, still doesn't explain the persistence of the "excess" (assuming it is excess)....... if they are not worth this then the market would introduce an institution that would make even more profit by paying their employees far less than the excess levels, and it would still operate well if the renumeration levels are excessive of what the market would naturally provide..... going back to the football analogy it's as if the premiership clubs started behaving like financial institutions they would be paying all their players 120k per week wheras in reality they only need to pay the likes of Drogba, Torres and Fabregas and so on these high amounts not say Nosworthy of Sunderland...... it wouldn't happen and you still haven't explained away the "excess" in the financial world

JERUP 18 Jan 2010 , 3:09pm
JERUP 18 Jan 2010 , 3:15pm

I work for a Company that is not a bank, but has an oversea bank as a parent. We have not been involved in any dodgy dealing - derivative instrumetns of derivative instruments, no Madoff or similiar funds (we thought they looked dodgy!) have had no Government handouts, and have kept more than adequate capital and liquidity before and throughout the crisis. I am employed in compliance and we usually if the company is successful are rewarded through bonuses, as quite rightly salaries ar ekept low to maintain low fixed costs and now due to this Governments total inability to understand anything cannot receive a reasonable remuneration. As usual their scatter gun approach has avoided hitting any appropriate target and murdered the innocent.
It really makes you proud to be British!

Chorlton1 19 Jan 2010 , 12:48pm

If the banks think they have enough spare cash in the pot to pay bonuses perhaps they should be forced to reinvest it in the business and improve their service to the customer. There too many businesses making cheap cuts at the bottom to fund the top of the pyramid. Supermarkets with dozens of service tills and barely half of them in use, banks with multiple service desks and 2 people serving customers. We are living in a fat cat society and most of us strive to be where the grass is greener by fair means or foul.

saskatonian 19 Jan 2010 , 7:18pm

A popular topic for sure. It has always been a conundrum to me that we value bankers so highly, particularly given the insight of this article. Shareholders will never stop the insanity because the very institutions that support big bonuses are the majority shareholders. It's a nice club. Perhaps our society would have a better future if we paid engineers, scientists, inventors the sort of money we pay bankers. But how? Food for thought. (and don't get me going on property developers...)

rodgerdp 22 Jan 2010 , 4:25pm

In reply to eightzero, in my inexpert judgement, a lot of the money comes from taxpayers, pension funds, and other investments. The investment banks are making huge profits by gambling with taxpayer money (for those that were bailed out, and arguably for those who weren't even bailed out because the system may have gone down anyway without the bailout). The stock market is just a massive gambling machine for transferring wealth. Since banks get bailed out if they lose the gamble, they will always win. Meanwhile the rest of us are supporting them (along with all future taxpayers for the next umpteen years). Hence the term 'vampire squid' because they are sucking the money out of us via the stockmarket. Meanwhile because the government is printing money that it has 'borrowed' from the future, the value of the money we all own is eroding in value, which is in a sense another form of tax.

crocket1 23 Jan 2010 , 3:30am

I think many of you are missing the point. Bonus payments aren't part of a capitalist system. Rather a socialist one. You see, the benefit is passed to the employees rather than the owners. If most of you would wise up and get "paid" for a days work you wouldn't be winging on this site. Banking employees have set up the best "union" ever.

ajooba 26 Jan 2010 , 11:41am


here is an attempt at answering your question. Looks like a sensible article written by a person knowledgeable in Economics.


Personally I think they should not have bailed the banks out. If it was too big to fail, they should have broken it up sooner. Thats why they have anti trust laws in the U.S. They did break up AT&T and almost came close to breaking up Microsoft. I dont know why anti trust laws could not check behemoths such as AIG. But I guess in finance, it is probably more complex, because of the exotic financial instruments.

54Nick 01 Feb 2010 , 11:15pm

The guilty banking exec's & their cronie boards should have faced prosecution for crippling the world's economy. If they want to run to asia because of the goverment bonus cut threat, let them go!!

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