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.

Samira Shackle is a freelance journalist, who tweets @samirashackle. She was formerly a staff writer for the New Statesman.

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Who will win in Stoke-on-Trent?

Labour are the favourites, but they could fall victim to a shock in the Midlands constituency.  

The resignation of Tristram Hunt as MP for Stoke-on-Central has triggered a by-election in the safe Labour seat of Stoke on Trent Central. That had Westminster speculating about the possibility of a victory for Ukip, which only intensified once Paul Nuttall, the party’s leader, was installed as the candidate.

If Nuttall’s message that the Labour Party has lost touch with its small-town and post-industrial heartlands is going to pay dividends at the ballot box, there can hardly be a better set of circumstances than this: the sitting MP has quit to take up a well-paid job in London, and although  the overwhelming majority of Labour MPs voted to block Brexit, the well-advertised divisions in that party over the vote should help Ukip.

But Labour started with a solid lead – it is always more useful to talk about percentages, not raw vote totals – of 16 points in 2015, with the two parties of the right effectively tied in second and third place. Just 33 votes separated Ukip in second from the third-placed Conservatives.

There was a possible – but narrow – path to victory for Ukip that involved swallowing up the Conservative vote, while Labour shed votes in three directions: to the Liberal Democrats, to Ukip, and to abstention.

But as I wrote at the start of the contest, Ukip were, in my view, overwritten in their chances of winning the seat. We talk a lot about Labour’s problem appealing to “aspirational” voters in Westminster, but less covered, and equally important, is Ukip’s aspiration problem.

For some people, a vote for Ukip is effectively a declaration that you live in a dump. You can have an interesting debate about whether it was particularly sympathetic of Ken Clarke to brand that party’s voters as “elderly male people who have had disappointing lives”, but that view is not just confined to pro-European Conservatives. A great number of people, in Stoke and elsewhere, who are sympathetic to Ukip’s positions on immigration, international development and the European Union also think that voting Ukip is for losers.

That always made making inroads into the Conservative vote harder than it looks. At the risk of looking very, very foolish in six days time, I found it difficult to imagine why Tory voters in Hanley would take the risk of voting Ukip. As I wrote when Nuttall announced his candidacy, the Conservatives were, in my view, a bigger threat to Labour than Ukip.

Under Theresa May, almost every move the party has made has been designed around making inroads into the Ukip vote and that part of the Labour vote that is sympathetic to Ukip. If the polls are to be believed, she’s succeeding nationally, though even on current polling, the Conservatives wouldn’t have enough to take Stoke on Trent Central.

Now Theresa May has made a visit to the constituency. Well, seeing as the government has a comfortable majority in the House of Commons, it’s not as if the Prime Minister needs to find time to visit the seat, particularly when there is another, easier battle down the road in the shape of the West Midlands mayoral election.

But one thing is certain: the Conservatives wouldn’t be sending May down if they thought that they were going to do worse than they did in 2015.

Parties can be wrong of course. The Conservatives knew that they had found a vulnerable spot in the last election as far as a Labour deal with the SNP was concerned. They thought that vulnerable spot was worth 15 to 20 seats. They gained 27 from the Liberal Democrats and a further eight from Labour.  Labour knew they would underperform public expectations and thought they’d end up with around 260 to 280 seats. They ended up with 232.

Nevertheless, Theresa May wouldn’t be coming down to Stoke if CCHQ thought that four days later, her party was going to finish fourth. And if the Conservatives don’t collapse, anyone betting on Ukip is liable to lose their shirt. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.