JUDGING by public and media sentiment over the past couple of years, the fairground arcade staple of whack-a-mole will at some point be replaced by the sport of whack-a-banker. The credit crunch blame-game does not appear to be dissipating. A particular bone of contention between the banks, politicians and the public is the issue of bank bailouts and their staff bonuses. Banks have recognised that they played a large part in the economic crisis. At a Treasury Select Committee hearings into the crisis in 2009, RBS and HBOS famously apologised, while adding that the global economic maelstrom overtook them.
Taxpayers have found it hard to understand why bonuses and massive pay packages are still being paid to those who have been blamed for the crisis. And as we enter the second week of the General Election campaign, the three main political parties in the UK have all announced some sort of levy or tax directed at the banks or specifically on bonuses.
As well as apologising, senior executives at banks have made shows of conciliatory behaviour, with several top bankers publicly turning down their bonuses. In the US and UK, the chief executives at Barclays, HSBC, Lloyds, RBS, and Citigroup all rejected bonuses or pay.
For example, Bob Diamond, president at Barclays bank turned down a bonus this year for the second year in a row despite the bank making a £11.6bn profit. Diamond will still be taking home £22m this year from the sale of Barclays Global Investors, in which he had a stake. On Wall Street, bonuses for last year leapt 25 per cent from the year before to an average of $123,850 per bonus, with $20.3bn to be paid out in total. Last year, a “horrified” President Obama was variously reported as considering some of the bonuses paid for 2008 as “shameful”, “an outrage” and “irresponsible”.
Although the payouts for 2008 were well down on previous figures, there is still an air of unacceptability about big pay-packets. While banks are within their rights to pay bonuses that they can afford, doing so in the current climate has made people angrier and lead to serious political capital being made from bank bashing.
There is something to the argument that without such high bonuses, top bankers will take their talent elsewhere. But there is also an argument that without globally co-ordinated action on the level of bonuses, nothing much effective can really be done to control them.
There is a global knock-on effect regarding pay; if Wall Street is happy to pay out, then London has to do the same to keep hold of talent. Bonuses go up fast in the good years, fall only slightly in the very bad, and then continue their inexorable march when things show signs of recovering. The issue of banker bonuses is particularly important if either the level or structure of remuneration incentivises behaviour such as excessive risk taking. In essence, that is what many bankers have been accused of, and causing a global recession as a consequence. The issue has produced a lot of argument but to date there has been remarkably little research done on the subject.
ACCA has now stepped into this gap and published new research into the relationship of bonuses to profits. The report - The Accounting Statements of Global Financial Institutions and the Recent Crisis was written by experts from Cass Business School, Gatehouse Bank, and the Global Association of Risk Professionals. A total of 19 banks were analysed for the research – large global investment banks and large US and European commercial and corporate banks.
Brandon Davies, one of the authors of the report, says: “The sample is small, but our analysis shows there has been substantial growth of executive compensation in all these banks, especially towards the end of the period 2001-2006. It is also clear that there are very great differences between banks – some have a relatively low rate of growth of senior executive remuneration, some extraordinarily high.”
Deutsche Bank stands out in the research for having a conservative compensation culture, with a stable remuneration system between 2003 and 2006, even while the bank’s revenues grew rapidly. On the other hand, at Northern Rock, remuneration packages between 2001- 2006 grew by 483 per cent, leaving senior executives at the doomed mortgage lender on similar packages to those at major commercial banks and well above their more durable rivals.
Looking back can help to decide whether the growth of senior executive compensation has been excessive. There are individual banks – notably Barclays, Goldman Sachs, Lloyds TSB and Northern Rock – where senior executive compensation grew much faster than dividends and pre-tax income, at least until 2006. The overall picture is that, while total senior executive compensation grew very fast over the years 2001-2007, in most of these banks this growth is not clearly more rapid than that of either dividends or pre-tax earnings.
The report’s authors believe that senior executive remuneration has responded to far too great an extent to short term changes of bank earnings and share prices, and has been only loosely related to the long term corporate performance which creates shareholder value. If this is indeed the case, then this would be indicative of remuneration structures incentivising short term risk taking behaviour.
On a related issue, the report says that financial reports are already very long and complex, especially those of banks and other financial institutions. The analysis has suggested that there needs to be much greater disclosure, especially of returns and risks broken down by business line, of potential liquidity risks and of remuneration. This is necessary both for effective corporate governance and for regulation.
So what of the future? Remuneration practices were not the only cause of the banking crisis, or even the most serious. But for governments, regulatory bodies and the general public alike, they will continue to resonate as a very potent symbol of the way many bankers appear to see the world around them. If the banks do not of their own volition better align their remuneration practices with their sustainable profitability, the new taxes we have already seen introduced could become the start of a wider regulatory clamp-down. After all, the implicit state guarantee which saved the banks last time will only ever be as good as the state’s ability, and stomach, to pay.
John Davies is head of business law at ACCA