WEEKEND COLUMNISTS Are bonuses a bad thing? Much of the debate about how to avert another financial crisis has centred on them. This misses the point. Lehman, the highest-profile failure, paid a large portion of its staff remuneration in shares that they could only get their hands on over a period of years. This seems to be close to what most people are proposing now. Yet it didn’t stop Lehman collapsing.
I don’t believe it is the structure of bankers’ pay deals that everyone is getting worked up about. I suspect it is their sheer size. That is nothing more than envy, which does not require legislation. If people have difficulty with bankers earning such large sums, they need to stop banks from making the kind of profits that enable those bonuses to be paid. Is that practical? Is it desirable? Should governments interfere with markets? I don’t think so.
Blaming bonuses for everything is as flawed as it is convenient. Among those who refuse to see bonuses as the root of all evil is the chairman of the Financial Services Authority, Adair Turner. “It is possible,” he recently argued in a speech at the Mansion House in the City of London “to overstate the importance of bonus structures in the origins of the crisis: they were, I believe, much less important than huge failures in capital adequacy and liquidity regulation.”
The super-normal profits that investment banks make come about partly because (whatever people say) the City is not a perfectly efficient market. Companies don’t – indeed can’t – shop around for advice or underwriting services. To use a recent example, can you imagine Liberty International’s finance director calling every investment bank in town to ask: “Right, how much would you quote me for an accelerated book building process to place 9.9 per cent of our issued capital?” If he had, the secret would have been out and the deal (or at least, its pricing) dead in the water. When Merrill Lynch agreed a price with him, I doubt they did so in competition with three of four other suppliers.
Companies are not indifferent over who advises them or places their shares, any more than I am indifferent over who cuts my hair. I am not going to call around to find the best price for a haircut or colour – it would take too long and in any case I wouldn’t trust most of the candidates to do it right. The best hairdressers, my own included, charge very handsomely for their services and keep a substantial proportion of their fee as incentive pay – tips. They do not have ceilings imposed on their compensation, they do not receive deferred payments and their employers are free to compete on price or any other basis in what, like banking, is an imperfect market. Like investment banks, they may come up with products and services that are “socially irrelevant”, to quote Lord Turner again.
But even social irrelevance is ultimately a matter of opinion. Lord Turner may not want to go out on a Saturday and buy a Collateralised Debt Obligation-squared, but equally he may not wish to get his hair done in such a way that he does not have to blow-dry it for 12 weeks. (Adair, just in case this does appeal, I suggest Urban Retreat at Harrods. It’s called a Brazilian and costs about £300, and I am desperate to find the time to go and get it done.)
So, please lay off bankers. Let’s admit that our only problem with the way they are paid is that some of us are jealous that we don’t earn that much ourselves. And let’s get back to focusing on solutions more likely to help, such as whether we need a new Glass-Steagall Act, or something like it, that would help to prevent riskier businesses from endangering safer ones. Just consider this – if bankers are not receiving bonuses and paying tax on them, where is the money going to come from to pay back our horrendous budget deficit?
