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Bonuses are in desperate need of a rebranding. This week, they were slammed by the presidents of the US and France as well as by the UK business secretary. But, if companies started using the word “incentive” instead, perhaps these much-vilified payments would sound more palatable. Barack Obama could not possibly call incentives “shameful”.
A failure to acknowledge what bonuses are supposed to achieve shows how shallow the political fury over them has become. Sure, bonuses were excessive when the banking sector was private and even more so now that many of the banks are on government life support.
But last year, the average Wall Street bonus was just $112,000, according to the Office of the State Deputy Comptroller. Averages can often be misleading, of course, but this suggests it is a mistake to see all bankers as being as rich as Croesus. Even massive bonuses can be justified if they are structured to be aligned with the interests of shareholders and do not encourage excessive risk-taking.
Josef Ackermann, chief executive of Deutsche Bank, Germany’s biggest bank, was certainly right to warn that US banks subjected to arbitrary pay curbs would run the risk of losing their best staff to overseas rivals. Given public cynicism about the financial world, politicians are finding it more convenient to argue that bankers are lucky to have jobs at all, let alone bonuses.
But this is short-sighted. Troubled banks may struggle to attract talent if they limit compensation to base salaries that have historically been a minor component of overall compensation. Many of the best bankers, often already wealthy enough to retire if they wanted, simply may not bother turning up for work if that is all that is on offer. Allowing the mob to legislate variable pay out of existence – making it hard for banks to introduce flexibility into cost bases – will be an error. Axe “bonuses” by all means but keep incentives.
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