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Why Stephen Hester's £963,000 bonus is a distraction

Quibbling over the bonus paid to the RBS boss is simply gesture politics.

Stephen Hester, the head of the Royal Bank of Scotland, is to receive a bonus of £963,000. Predictably, this has triggered outrage among the commentariat, and harsh condemnations from politicians.

Liberal Democrat Foreign Minister, Jeremy Browne, told Question Time that Hester should decline the bonus as "a question of honour", while the shadow business secretary Chuka Umunna told the Today programme that Hester's salary of more than £1m should be sufficient reward for doing a good job.

Outrage around bonus season is becoming something of an annual tradition. But what purpose does it really serve? In the last few hours alone, I've heard three radio discussions of the ins and outs of Hester's package. It's half what he received last year; it will all be paid in shares; he could have been earning much more in another job; he wasn't even a banker at the time of the crash.

There is no disputing that the sums of money involved are grotesque. The fundamental injustice that bankers continue to receive ludicrous sums of money while jobs are being lost across the country prompts a visceral anger in many people. This very real, very widespread rage is what politicians are attempting to tap into when they indulge in a spot of banker-bashing.

One point that comes up repeatedly is that of fairness: why should these people earn more than doctors, nurses, civil servants, or engineers? It's a valid question, but it is not answered by removing one banker's bonus. Scoring political points by forcing one individual to refuse their reward package does not solve the wider problem of sky-high financial remuneration.

In this summary of the arguments for and against banker's bonuses, Dr Ruth Bender of the Cranfield School of Management explains that change to pay packages must be consistent:

We cannot change pay for just some bankers -- just in the UK, or only in certain banks -- any more than we can change the traffic rules so that blue or red cars have to drive on the right! A few years ago I did research into executive pay, interviewing the great and the good to determine why they got paid what they did. One City CEO explained it very simply. He said that if "they" were to halve the pay of all the CEOs in the City, then no-one would bat an eyelid. But it would have to be all the CEOs. If even one individual retained his high compensation, then the others would demand parity.

RBS is a taxpayer-owned bank, and it is fair that it is subject to extreme scrutiny. But this forensic focus on the remuneration package of Hester, who is, at the end of the day, just one person, risks acting as a distraction from deep systemic, structural problems. Both EU and UK regulation have so far failed to addressed these deeper issues, preferring to focus on the symptoms rather than the causes.

This Economist blog summarises what some of these problems are:

Taxpayers' underwriting of bankers' operations -- socialised risk and privatised reward -- is one clear reason for excessive returns. The cartel-like structure of high-end banking, driven by both regulatory barriers to entry and economies of scale, also enables the sector to generate rents.

But in investment banking, the biggest cause of high pay could be clients' principle-agent problem and the "natural" inefficiency of big deals. When a management team chooses an investment bank, they likely to be more concerned about protecting their reputation ("no one got fired for hiring Goldman Sachs") than saving money. And in a multibillion dollar deal, shareholders are unlikely to kick up a fuss over a few million dollars wasted on expensive bankers. As a banker interviewed by the New Yorker put it, "[if] you are going to do a five-billion-dollar deal...Are you really going to fight about whether a certain fee is 2.5 per cent or 3.3 per cent?"

So, no, objectively Hester shouldn't be receiving such a high bonus. But it is the system which makes this compensation expected -- necessary, even -- that should be looked at, not the details of the payment received by one man, in one year. Such gesture politics do nothing to solve the underlying problem. We should be more worried about that fact that no-one appears willing to undertake the fundamental restructuring of the financial sector that would ensure fairness and prevent another financial crash.