The difficulty of overcoming the culture of bankers’ bonuses

It is bonus season and ‘banker bashing’ is firmly back on the agenda. Whilst the country continues to face the economic fall from the 2008 financial crisis, we are living through 8.3% unemployment, public sector pay freezes and an ever increasing cost of living. At the same time, grotesque sums of money have once again been handed to the few whose mistakes we are all paying for. Steven Hester’s decision to return his £963,000 bonus from state-owned RBS last week means that he will have to struggle on with a pitiful salary of £1.2m. At the same time, “absolutely necessary” welfare cuts mean families with disabled children and those who care for a disabled partner stand to lose £3000 each by 2015. The sense of injustice is palpable.

The above seems difficult to understand – unless you’re a member of this champagne caviar world, remaining completely out of touch with the rest of society. We are living in a world where a bonus of close to £1m is seen as modest. In Hester’s terms, state owned or not, he is already doing a difficult job for low pay, choosing to compare his salary to Bob Diamond’s hefty £10m bonus for 2011, as opposed to a Second Lieutenant’s salary of less than £25,000 per annum. Bonuses are systemic in banking. With the growth of the global financial sector over the last forty years, they are a symptom of an industry which deals with vast amounts of money. Companies can afford to pay these huge sums and with global competition for the greediest (or most competent, depending on how you look at it) wealth creators, it has become the only way to survive.

There is lots of evidence that bonuses don’t even work in the banks’ favour – creating a self-perpetuating positive incentive for making money in the absence of a negative incentive for losing it. In fact, they encourage risky behaviour which is, paradoxically, the problem that’s got us here in the first place. What is more, there’s a growing culture of bonuses regardless of merit – even more dangerous in terms of incentives.

The problem is that banks are never going to get rid of bonuses for themselves. Even if they wanted to, global competition makes it unfeasible and big pay gives banks a big name and attracts the big people. Governments are also unlikely to intercept. The cabinet’s refusal to intervene even in the case of RBS does not suggest they are a beacon of progress for fair pay. Again, even if they wanted to help (although any governmental desire to intervene is strictly hypothetical), they face the same problem of competition. Financial services account for more than a tenth of UK tax revenues and a significant chunk of our economy. Huge profits from “proprietary trading” (banks who bet with their own money as opposed to using their customers’) involve high risks for a small relative contribution to society, and can easily be described as socially inefficient.

Unfortunately, that doesn’t mean we’re currently in any position to lose them. Furthermore, with harsh austerity measures, lending is supposed to form a big part of our return to growth. Our whole economy has become over-dependent on finance in the boom years leaving the UK constrained, unable to make big changes. The banks constantly pose the threat of moving business abroad if conditions in London become unfavourable, and even without additional regulation or taxation it is seen as unlikely that the City of London will maintain its current position in the finance world forever.

Given this, the question is how much are we willing to put up with in order to maintain a financial sector? Current public pressure is creating forces that work in the right direction. Hope is going for a heavier investment in more long term bonus structures, which will help prevent the sort of short term risks which create crises.

In addition, the government have become more oppositional to bonuses which are not performance based (albeit in rhetoric rather than any real policy action). Project Merlin provided lending targets to banks, aiming to bring actions in line with the needs of society; however, rather pessimistically, banks failed to reach targets nine months in.

Despite anger mounting across the world, the scope for change within any individual country appears to remain piecemeal at most. In America, lobbying donations from banks hit a record high last year and banking influence remains dominant. Meanwhile, in Europe, the financial headlock has effectively extended its power to a technocratic government in Italy.

It seems that within the constraints of globalisation the world has been willing to put up with a hell of a lot, and here in the UK we are no exception. Since 2008, the bonus season has come to serve as a crass reminder of the levels of inequality that continue to burden our stalling economy. However, whether we like it or not, it looks like bankers and their bonuses are here to stay, for the mean time.