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.

Chuka Umunna speaks at the launch of Labour's education manifesto during the general election. Photograph: Getty Images.
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After so badly misjudging the leadership contest, how will the Blairites handle Corbyn?

The left-winger's opponents are divided between conciliation and aggression. 

When Labour lost the general election in May, the party’s modernisers sensed an opportunity. Ed Miliband, one of the most left-wing members of the shadow cabinet, had been unambiguously rejected and the Tories had achieved their first majority in 23 years. More than any other section of the party, the Blairites could claim to have foreseen such an outcome. Surely the pendulum would swing their way?

Yet now, as Labour’s leadership contest reaches its denouement, those on the right are asking themselves how they misjudged the landscape so badly. Their chosen candidate, Liz Kendall, is expected to finish a poor fourth and the party is poised to elect Jeremy Corbyn, the most left-wing leader in its 115-year history. For a faction that never ceases to underline the importance of winning elections, it will be a humbling result.

Though the crash has been sudden, the Blairites have long been in decline. Gordon Brown won the leadership unchallenged and senior figures such as John Reid, James Purnell and Alan Milburn chose to depart from the stage rather than fight on. In 2010, David Miliband, the front-runner in the leadership election, lost to his brother after stubbornly refusing to distance himself from the Iraq war and alienating undecided MPs with his imperiousness.

When the younger Miliband lost, the modernisers moved fast – too fast. “They’re behaving like family members taking jewellery off a corpse,” a rival campaign source told me on 9 May. Many Labour supporters agreed. The rush of op-eds and media interviews antagonised a membership that wanted to grieve in peace. The modernising contenders – Chuka Umunna, Liz Kendall, Mary Creagh, Tristram Hunt – gave the impression that the Blairites wanted to drown out all other voices. “It was a huge mistake for so many players from that wing of the party to be put into the field,” a shadow cabinet minister told me. “In 1994, forces from the soft left to the modernising right united around Tony Blair. The lesson is never again can we have multiple candidates.”

While conducting their post-mortem, the Blairites are grappling with the question of how to handle Corbyn. For some, the answer is simple. “There shouldn’t be an accommodation with Corbyn,” John McTernan, Blair’s former director of political operations, told me. “Corbyn is a disaster and he should be allowed to be his own disaster.” But most now adopt a more conciliatory tone. John Woodcock, the chair of Progress, told me: “If he wins, he will be the democratically elected leader and I don’t think there will be any serious attempt to actually depose him or to make it impossible for him to lead.”

Umunna, who earlier rebuked his party for “behaving like a petulant child”, has emphasised that MPs “must accept the result of our contest when it comes and support our new leader in developing an agenda that can return Labour to office”. The shadow business secretary even suggests that he would be prepared to discuss serving in Corbyn’s shadow cabinet if he changed his stances on issues such as nuclear disarmament, Nato, the EU and taxation. Were Umunna, a former leadership contender, to adopt a policy of aggression, he would risk being blamed should Corbyn fail.

Suggestions that the new parliamentary group Labour for the Common Good represents “the resistance” are therefore derided by those close to it. The organisation, which was launched by Umunna and Hunt before Corbyn’s surge, is aimed instead at ensuring the intellectual renewal that modernisers acknowledge has been absent since 2007. It will also try to unite the party’s disparate mainstream factions: the Blairites, the Brownites, the soft left, the old right and Blue Labour. The ascent of Corbyn, who has the declared support of just 15 MPs (6.5 per cent of the party), has persuaded many that they cannot afford the narcissism of small differences. “We need to start working together and not knocking lumps out of each other,” Woodcock says. There will be no defections, no SDP Mk II. “Jeremy’s supporters really underestimate how Labour to the core the modernisers are,” Pat McFadden, the shadow Europe minister, told me.

Although they will not change their party, the Blairites are also not prepared to change their views. “Those of us on this side of Labour are always accused of being willing to sell out for power,” a senior moderniser told me. “Well, we do have political principles and they’re not up for bartering.” He continued: “Jeremy Corbyn is not a moderate . . .
He’s an unreconstructed Bennite who regards the British army as morally equivalent to the IRA. I’m not working with that.”

Most MPs believe that Corbyn will fail but they are divided on when. McFadden has predicted that the left-winger “may even get a poll bounce in the short term, because he’s new and thinking differently”. A member of the shadow cabinet suggested that Labour could eventually fall to as low as 15 per cent in the polls and lose hundreds of councillors.

The challenge for the Blairites is to reboot themselves in time to appear to be an attractive alternative if and when Corbyn falters. Some draw hope from the performance of Tessa Jowell, who they still believe will win the London mayoral selection. “I’ve spoken to people who are voting enthusiastically both for Jeremy and for Tessa,” Wes Streeting, the newly elected MP for Ilford North, said. “They have both run very optimistic, hopeful, positive campaigns.”

But if Corbyn falls, it does not follow that the modernisers will rise. “The question is: how do we stop it happening again if he does go?” a senior frontbencher said. “He’s got no interest or incentive to change the voting method. We could lose nurse and end up with something worse.” If the road back to power is long for Labour, it is longest of all for the Blairites. 

George Eaton is political editor of the New Statesman.

This article first appeared in the 03 September 2015 issue of the New Statesman, Pope of the masses