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'Bankers deserve bonuses'

For the past decade John Roberts has worked within a bank in the City where the annual cash bonus is

Until recently the City has been an opaque place where a strange language is spoken, alien amounts of money earned, largely through unimaginably vast bonuses.

And, I concede, I've not done too badly out of it. But don't get me wrong – by banking standards I'm not one of those big earners.

Not by a longshot.

The securities firm where I work is part of an international banking group one, incidentally, which hasn't received state aid.

The firm comprises two divisions - securities and corporate finance.

The securities division generates commission from dealing in shares for large investors and generates profits from market making – that's a turn on the difference between the price at which the firm offers to buy and sell shares for clients. It also trades in shares with its own funds.

Its analysts publish research on quoted companies, the salesmen talk about this research, together with general news. This joint effort is intended to generate buy and sell orders from pension, investment and hedge fund clients. Market makers and traders buy and sell shares.

The corporate finance division works for companies to earn advisory fees. Fees mainly come from acquisitions and from equity (share) fundraisings (initial public offerings, rights issues and placings), where the corporate finance and securities divisions operate in tandem.

As such, the firm, and the 15-20 London firms like it, thrive in positive market conditions where investors are keen to invest in shares but suffer when negative sentiment prevails.

The business is operationally geared. The overhead – basic salaries, office space, systems and IT – is high but there is little variable cost. Once the overhead's been covered, the vast bulk of additional revenues go straight to operating profit. Revenues in the range of £50-60m represent a reasonable, if unexceptional, year.

More than 100 people work in the firm about a third of whom would see themselves as senior revenue generators or managers. Senior employees earn base salaries of £100-130K.

The bonus pot

Internally, the bonus pot is seen as the purpose of the firm. The potential to double, triple or even quadruple your base salary – not unrealistic for decent performers in benign conditions - is seen as the principal purpose for working. And it makes for a motivating and exciting environment. Few things galvanise effort more than money.

There is a sense that the basic salary is required to get you to turn up and that any reasonable level of performance justifies the payment of a bonus.

The workings of the overall bonus pot in our organisation are in part simple and clear and in part byzantine and opaque.

A simple and clear split is agreed between the owner and firm’s management as to the portion of pre-bonus operating profit which goes into the bonus pot. This generally ranges from a third to a half in this subsector. It is understood throughout the firm that it is in everyone’s interest to maximise the bonus pot. Little or no management is required.

With good momentum in the first half of the year, there is a huge collective effort to build up commissions and fees, particularly in the last quarter.

People understand that improving the overall quality of the business - by attracting good clients - should make maximising the pot easier in the medium term.

So why would businesses like this keep their system for rewarding their employees so opaque?

In theory, the guiding principle should be how much revenue you have brought in or assisted during the year combined with your contribution to the medium term health of the firm through client wins, analyst ranking by investors, deal quality and profile.

In practice, while management talks fluently about transparency, procedure and principles, such an approach would be unworkable.

A clear and transparent procedure would, at best, be used by employees to argue in detail their bonus level and, at worst, to litigate. It helps that no-one else knows what you are awarded.

But here's the downside. Your performance is only part of it. The rest is politics and if your currency is high in the company then you could, in extreme but not uncommon circumstances, get three times the bonus of a similarly performing, though less favoured colleague.

The half a dozen heads of each activity meet to decide what each person should get.

Some of these individuals will fight for their teams. Others may not because they need to think carefully about their own positions. They need to leave a fair chunk of the pot free for themselves.

Giving too much credit to team members could underplay the importance of outstanding management!

In practice, the key markers are the overall size of the pot and what each individual got last year.

The interpretation which most accurately seems to fit the facts is that the heads then seek to pay out as little as they can get away with so as not to unbalance the ship too much whilst leaving as much as possible for the favoured few and themselves.

There are probably three avenues to joining the very small group of super earners, who can pull in more than £400K in non-exceptional years - this is not a highly paid part of the City.

Being very good, means delivering large revenues by quietly getting on with the job, or joining the management group or becoming favoured by management either through politics or making a lot of noise.

Considering the firm, there may be three or four individuals at one time (out of more than 100) who are very good and whose departure would be felt across the company.

These people are usually unremarkable to meet but have the knack of developing strong relationships with big hitting clients. As the firm depends on their earning power, these people need to be well remunerated.

Of the half a dozen heads, no individual directly sets his own bonus but as a member of this group you can frame the discussion and make your case directly.

Becoming part of this group requires good performance early in your career followed by a lot of time and effort politicking – or simply being hired from another firm.

Climbing upwards necessitates stepping on people – and only a minority are willing to embark on this high risk strategy.

More time managing means less client contact and weaker client relationships – ultimately clients pay bills. Life expectancy for a head is not long – generally three to four years maximum. This makes it imperative to squeeze the most out during the years in the sun.

Members of the favoured group are usually very impressive to meet. It is only with a reasonable level of probing and watching their mediocrity becomes apparent.

Joining this group requires a mixture of charm, eloquence and shamelessness. Symptoms include the development of an external profile and regular threats to leave the firm citing attractive job offers.

This is a difficult game to play and, again, requires a certain type of character but has been done very effectively over the years leading to a substantial misallocation of the bonus pot, particularly in boom years.

To continue the criticism, it is possible to cite disasters for both employee and firm which inevitably accompany a secretive bonus procedure that can allow both management and employees to act without scruple.

It is not uncommon for strong performers to be awarded zero bonuses as a result of a mixture of personal animosity and political miscalculation.

Employment lawyers advise that unless some form of discrimination – sex or age - can be demonstrated, the courts are (sensibly) very reluctant to get involved. Bonuses are explicitly discretionary and the employee’s redress is to quit.

And, of course, the system can be worked. For example one of the activity heads secured very substantial bonuses for himself and two colleagues, no doubt citing their irreplaceability.

Inexplicably and against previous practice, the firm agreed not to retain any portion of these bonuses and the day the money hit their bank accounts, he and these colleagues walked and joined a rival firm. Such stories are not uncommon.

All that said, for the genuine stars and the bulk of the team – reasonably good if unexceptional performers – the best policy is to get on with the job of servicing clients and delivering revenue.

Annual cash bonuses work well for businesses which generate annual cash profits. While rewarding performance year by year clearly encourages short termism, most senior employees are in for the medium term and are therefore interested in promoting the ongoing health of the business.

And there's something else. It seems to this avowed capitalist at least that a bonus system where the business owner agrees to share a very material portion of the profits with the employees, who take no capital risks, has a strong socialist dimension.

The approach seems instinctively very fair. And I'd argue with my eyes open to its many imperfections that the bonus culture overall works well. I commend it to other industries making up UK plc.

Of course these waters are muddied just now by the intervention of the government in propping up some of the larger banks and this exposes a curious dilemma.

As part of a large effectively bankrupted institution, employees at RBS are lucky to have jobs at all and the reverse laundering of tax payers money into bankers’s bank accounts must be a non-starter.

On the other hand, it seems grossly inequitable that, where there are profitable and cash generative businesses within it, those people who sweated to create profits and cashflow without which the bank would be in even worse fettle are now left high and dry without the reward they have worked for.

Put it this way, without those efforts made on the promise that bonuses would be awarded the taxpayers’ investment would be in even more peril than it already is.

In addition, restricting bonuses is suicidal for the medium term value of those good businesses within the group.

The answer to that rather knotty dilemma? I don’t know. But perhaps reneging on a promise in order to shoot yourself in the foot is politically necessary sometimes.

John Roberts is not the author's real name

Martin O’Neill for New Statesman
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1966 and all that

A year of World Cup glory, meeting Paul McCartney and eating placenta.

Fifty years ago this Saturday, on 30 July 1966, I was at Wembley. I have my ticket and my programme to prove it. I also have my 1966 ­diary, which I am looking at now. I was 30, weighed ten stone and eight pounds, and my waist was 32 inches – about as hard to believe now as England winning another World Cup final.

I am still in the same house, all these decades later, but my telephone number then was GUL 4685. GUL was short for Gulliver, I can’t remember why. In my list of contacts at the end of my diary is Melvyn Bragg, who was another recent arrival in London from Cumbria, like myself and my wife, on PRO 0790. PRO stood for Prospect, I think, which was the exchange name for somewhere over the river, possibly Kew.

My office number was TER 1234. I always thought that was a great and memorable number. It’s only now, thinking about it, that I realise that TER – meaning Terminus –
probably related to King’s Cross, which the Sunday Times was near in those days.

At the top of the charts in July 1966 were the Kinks with “Sunny Afternoon”, which I can well remember, as it was so ironically chirpy, and Georgie Fame with “Getaway”. I liked Georgie Fame – low-key, cool – but I can’t remember that tune. Both were replaced in August by the Beatles’ “Yellow Submarine”/“Eleanor Rigby”.

My day job in July 1966, on the Sunday Times staff, was writing the Atticus column. It still exists, but in a smaller, more skittery format. Previous incumbents included Ian Fleming, John Buchan and Sacheverell Sitwell, who was reputed to have got free Mateus rosé for life after giving the wine its first mention in an English newspaper.

I had been on the paper since 1960, after spending two years as a so-called graduate trainee journalist, mainly in Manchester, which was a laugh. There was no training and there were no lessons in law. You had a mentor for a few weeks and then you got on with it.

In my first few years as the boy on Atticus, I never had my name in the paper. I had to write dreary paragraphs about who might be our next man in Washington, or the bishop of London, or the master of Balliol, as if I cared. I wanted to write about footballers, gritty northern novelists, pop stars.

When I started at the Sunday Times, I felt for a while that people were prejudiced against me, because I was northern and working class and had gone to grammar school and a provincial university (Durham). Everyone else seemed to have been at Oxbridge and gone to public school.

But this prejudice was all in my head, imagined, just as it had been when I used to go from Durham to visit my girlfriend, Margaret – whom I married in 1960 – at Oxford. I was convinced that some of her posh friends were being condescending ­towards me. Total nonsense, but I had a chip on my shoulder for some years. Gone, all gone, just like my 32-inch waist. (I am now 12 stone and the new shorts I bought last week have a 38-inch waist. Oh, the horror.) If anything, these past 50 years, any prejudice has been in my favour.

Harold Wilson was the prime minister in 1966. His northern accent was even stronger than mine. I still have a letter from him, dated 21 March 1963, after I interviewed him for Atticus. In the letter, he ­describes the 1938 FA Cup final in which Preston beat Huddersfield Town 1-0, scoring in the last minute of extra time. At the bottom of the page, in handwriting, he’d added: “after hitting the crossbar”.

What I remember most about the interview was George Brown, who was deputy to
Wilson as Labour leader at the time, hanging around outside his office, drunk. Marcia Williams, Wilson’s secretary, was going around tut-tutting, making faces, complaining about George. I thought she shouldn’t have done, not in front of me, as I was a total stranger and a hack. (I don’t think we called ourselves hacks in those days, which is the normal, half-ironic self-description today.)

Harold was a football man and also a real know-all, forever boasting about his memory for facts and figures. The contents of this letter illustrate both aspects of his character. It led me later to collect a letter or autograph from every prime minister, going back to Robert Walpole. Only took me ten years.

There is a myth that England’s 1966 win helped Labour stay in power – which does not quite stand up. The general election was in March – four months before the final. But Wilson did milk England’s victory, identifying himself and the nation with our English champions.

It is possible that the reverse effect happened in 1970, when Wilson was chucked out and Edward Heath came in. England’s defeat at the 1970 World Cup by West Germany was just four days before the June general election.

***

I got my ticket for the 1966 World Cup final – for one of the best seats, priced at £5 – from my friend James Bredin, now dead, who was the boss of Border Television. Based in Carlisle, Border covered the Scottish Borders and the Isle of Man. It was a thriving, thrusting regional ITV station, now also deceased.

James’s chauffeur came to pick me up and waited for us after the match, a sign of the importance and affluence of even minor ITV stations. Border contributed quite a bit to the network, such as Mr and Mrs, starring Derek Batey, who presented 450 editions of this very popular national show. Batey was a local lad who started his show business life as an amateur ventriloquist in the little market town of Brampton, Cumbria, before becoming Carlisle’s Mr Show Business. He was so polished – lush hair, shiny suits, so starry, so glittery – that I always wondered why he was not in London, in the West End.

Border TV also produced some excellent documentaries that were networked across the ITV region, two of which I presented. One was about walking along Hadrian’s Wall and the other was about George Stephenson. For a while in the 1970s, I began to think I was going to become a TV presenter, despite being not much good. I was lousy at acting, which you need for television, and disliked asking questions to which I already knew the answers. And it took so much time. For each programme, we spent eight weeks on location with a crew of eight, just to make a one-hour documentary. Now they
do docs in a week with just two people.

For half an hour, I also imagined that I was going to become a playwright. In 1967, I had a play in the BBC’s Wednesday Play slot, awfully prestigious at the time, called The Playground. It was one of those shows that were filmed live and then wiped, so I have never seen it since, nor has anybody else. I blamed that for blighting my playwriting career, though till I was looking in my 1966 diary and saw that I was working on that play, I’d forgotten about its existence. As we go through life, we forget all the paths not trodden.

I’ve boasted endlessly about being at the 1966 Wembley final, and it was so exciting, but I can’t remember many of the details. I must have been aware of Geoff Hurst’s second goal being a bit dodgy, as there were loud complaints from the German fans, but as Sir Geoff, as he then wasn’t, went on to score a third goal, it didn’t really matter. At the time, I considered that the England-Portugal semi-final had been a better game, with our Bobby Charlton scoring two goals against one from Eusebio, but of course winning a final is winning a final and the excitement and the patriotic pride continued for weeks and months. We felt as if it had been our right to win – after all, did we not give the game to the world, lay down the first rules, show all those foreigners how to play our game?

The result was that we usually ignored all the new ideas and developments that were emerging from Europe and South America, carrying on with our old ways, stuffing our faces with steak before a game and knocking back six pints afterwards, a bit like Alf Tupper in the Rover comic. He lived on fish and chips, but on the race track he could beat anyone.

Those funny Continental players started playing in funny lightweight boots, more like slippers or ballet shoes, which seemed barmy to us. How we scoffed. How can you play properly, far less kick someone properly, unless your ankles are encased in hard leather as tough as steel? Who cared if they weighed a ton, especially in wet weather? We Brits were tough.

The top First Division stars of 1966 earned about £200 a week, including bonuses, and lived in £20,000 houses, semi-detached, on new estates with Tudor overtones. The top players drove Jaguars. But most were lucky to afford a Ford Cortina. I had one myself for a while. Awfully smart, or so I thought at the time.

Their basic wages were little more than double that of the best-paid working men, such as a foreman bricklayer or a successful plumber. Their neighbours on their estates were bank mangers or salesmen, a higher scale socially than their own background, but still fairly modest. Not like today. Footballers don’t even have neighbours any more. They are cocooned in their own gated mansions, with personal staff, gardeners, nannies, accountants, lawyers, agents.

Yet despite their modest lifestyles in those days, there were celebrity players, such as Bobby Moore, Bobby Charlton and, before them, Billy Wright, all household names, loved and admired, recognised everywhere.

None of them had an agent in 1966. The nearest thing to it was the system that operated if a team got to the FA Cup final. They would then agree to divvy up the peripheral proceeds, such as money from giving newspaper interviews, posing for staged corny photographs, opening shops, or selling their spare tickets to touts (which they were not supposed to do). They’d appoint some dodgy friend of one of the senior players to arrange the deals and collect the monies for them. Times, they always change. Otherwise, what’s the point, eh?

***

In 1966, two big events occurred in my personal life. In May that year, my son, Jake, was born – at home, in what is now our kitchen. He arrived so quickly that the midwife hadn’t turned up yet and he emerged with the cord twisted around his neck. I managed to untie it, which I have maintained since kept him alive (a trick I had learned at fathers’ classes).

Fathers’ classes – wow, what a novelty that was in the 1960s. Who says we were all chauvinist pigs back then? (Today’s young, female star writers at the New Statesman, probably.) I attended my first ones, at the Royal Free Hospital in 1964, when our firstborn, Caitlin, was about to arrive. I remember immediately thinking when the invite came that I would get 1,000 words out of this – which I did, for the Sunday Times women’s pages.

Also at those first-ever fathers’ classes at the Royal Free was a young BBC producer whose wife was also about to give birth: Wilfred De’Ath. He, too, was desperate to get a piece out of it. (He now writes occasionally for the Oldie, and he appears to be down and out and living in France.)

After Jake’s birth, I got the midwife to give me the placenta and I ate it, fried with onions. Tasted like liver. Another 1,000 words.

The other event of note in my ever-so-exciting life in 1966 was meeting Paul McCartney. When “Eleanor Rigby” came out, I thought the words – not just the tune – were so wonderful. Possibly the best poetry of the year, I said, as if I knew anything about poetry. I went to see him for Atticus in his new house in St John’s Wood, which he still has, being a very conservative feller. I talked to him about the background to the lyrics, as opposed to his hair, which interviewers were still asking him about.

A few months later, at the end of 1966, I went to see him again, wearing a different cap, as a screenwriter. I’d had a novel published the previous year, Here We Go Round the Mulberry Bush, which was being made into a film, with Clive Donner directing. We went to see Paul at his house and discussed with him if he would do the theme tune. He turned us down in the end but it was while I was with him that I suggested that there should be a proper biography of the Beatles. He said Brian (Epstein, the band’s manager) would have to agree – and there and then sat me down and helped me write a suitable arse-licking letter to him.

I eventually saw Brian, after several cancellations, at his home in Belgravia and he played me the acetate of “Strawberry Fields Forever”. I was astounded. It seemed to break every rule of what was then considered pop music. I wondered if all Beatles fans
would take to it. But I could see that it was amazing and perhaps the Beatles weren’t finished, which was what some people were saying in 1966. At my publisher, Heinemann, which paid me £3,000 for the book, there was one director who maintained the Beatles bubble was about to burst.

Brian agreed to my project and offered a clause in the contract that we had not requested or even thought of. He said he would not give any other writer access to the Beatles for two years after my book came out. This was 1966. The book came out in 1968. Two years later, in 1970, the Beatles were no more. Without realising it at the time, I became the only authorised ­biographer of the Beatles.

***

So, 1966, a big year for me, so glad I kept that diary, and also a big year for the nation. I thought at the time that the Beatles were bound to fade, eventually, while England surely would dominate world football from now on. After their humbling by Iceland at this year’s World Cup, I now realise that England will never win the World Cup again in my life, what’s left of it. And probably not even another game.

The only way to rationalise it is to tell ourselves that we are ahead of the game. We are rubbish, but in turn it will happen to all the other so-called advanced nations.

You could say Brexit is a bit like that. We are ahead of the other leading European nations in going it alone, even though it is depressing and awful and shameful. We are advanced in wilfully turning ourselves into a rubbish nation. We are leading the way, as ever. Inger-land, Inger-land.

Hunter Davies’s memoir of the postwar years, “The Co-op’s Got Bananas!” (Simon & Schuster), was published in April, followed by “Lakeland: a Personal Journal” (Head of Zeus). His final book on the Fab Four, “The Beatles Book” (Ebury), will be published on 1 September

Hunter Davies is a journalist, broadcaster and profilic author perhaps best known for writing about the Beatles. He is an ardent Tottenham fan and writes a regular column on football for the New Statesman.

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue