Show Hide image

'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

Wikimedia Commons
Show Hide image

The secret anti-capitalist history of McDonald’s

As a new film focuses on the real founder of McDonald’s, his grandson reveals the unlikely story behind his family’s long-lost restaurant.

One afternoon in about the year 1988, an 11-year-old boy was eating at McDonald’s with his family in the city of Manchester, New Hampshire. During the meal, he noticed a plaque on the wall bearing a man’s face and declaring him the founder of McDonald’s. These plaques were prevalent in McDonald’s restaurants across the US at the time. The face – gleaming with pride – belonged to Ray Kroc, a businessman and former travelling salesman long hailed as the creator of the fast food franchise.

Flickr/Phillip Pessar

But this wasn’t the man the young boy munching on fries expected to see. That man was in the restaurant alongside him. “I looked at my grandfather and said, ‘But I thought you were the founder?’” he recalls. “And that’s when, in the late Eighties, early Nineties, my grandfather went back on the [McDonald’s] Corporation to set the history straight.”

Jason McDonald French, now a 40-year-old registered nurse with four children, is the grandson of Dick McDonald – the real founder of McDonald’s. When he turned to his grandfather as a confused child all those years ago, he spurred him on to correct decades of misinformation about the mysterious McDonald’s history. A story now being brought to mainstream attention by a new film, The Founder.


Jason McDonald French

“They [McDonald’s Corporation] seemed to forget where the name actually did come from,” says McDonald French, speaking on the phone from his home just outside Springfield, Massachusetts.

His grandfather Dick was one half of the McDonald brothers, an entrepreneurial duo of restaurateurs who started out with a standard drive-in hotdog stand in California, 1937.

Dick's father, an Irish immigrant, worked in a shoe factory in New Hampshire. He and his brother made their success from scratch. They founded a unique burger restaurant in San Bernardino, around 50 miles east of where they had been flogging hotdogs. It would become the first McDonald’s restaurant.

Most takeout restaurants back then were drive-ins, where you would park, order food from your car, and wait for a “carhop” server to bring you your meal on a plate, with cutlery. The McDonald brothers noticed that this was a slow, disorganised process with pointless costly overheads.

So they invented fast food.

***

In 1948, they built what came to be known as the “speedy system” for a fast food kitchen from scratch. Dick was the inventor out of the two brothers - as well as the bespoke kitchen design, he came up with both the iconic giant yellow “M” and its nickname, the “Golden Arches”.

“My grandfather was an innovator, a man ahead of his time,” McDonald French tells me. “For someone who was [only] high school-educated to come up with the ideas and have the foresight to see where the food service business was going, is pretty remarkable.”


The McDonald brothers with a milkshake machine.

McDonald French is still amazed at his grandfather’s contraptions. “He was inventing machines to do this automated system, just off-the-cuff,” he recalls. “They were using heat lamps to keep food warm beforehand, before anyone had ever thought of such a thing. They customised their grills to whip the grease away to cook the burgers more efficiently. It was six-feet-long, which was just unheard of.”

Dick even custom-made ketchup and mustard dispensers – like metal fireplace bellows – to speed up the process of garnishing each burger. The brothers’ system, which also cut out waiting staff and the cost of buying and washing crockery and cutlery, brought customers hamburgers from grill to counter in 30 seconds.


The McDonald brothers as depicted in The Founder. Photo: The Founder

McDonald French recounts a story of the McDonald brothers working late into the night, drafting and redrafting a blueprint for the perfect speedy kitchen in chalk on their tennis court for hours. By 3am, when they finally had it all mapped out, they went to bed – deciding to put it all to paper the next day. The dry, desert climate of San Bernardino meant it hadn’t rained in months.

 “And, of course, it rained that night in San Bernardino – washed it all away. And they had to redo it all over again,” chuckles McDonald French.

In another hiccup when starting out, a swarm of flies attracted by the light descended on an evening event they put on to drum up interest in their restaurant, driving customers away.


An original McDonald's restaurant, as depicted in The Founder. Photo: The Founder

***

These turned out to be the least of their setbacks. As depicted in painful detail in John Lee Hancock’s film, Ray Kroc – then a milkshake machine salesman – took interest in their restaurant after they purchased six of his “multi-mixers”. It was then that the three men drew up a fateful contract. This signed Kroc as the franchising agent for McDonald’s, who was tasked with rolling out other McDonald’s restaurants (the McDonalds already had a handful of restaurants in their franchise). 

Kroc soon became frustrated at having little influence. He was bound by the McDonalds’ inflexibility and stubborn standards (they wouldn’t allow him to cut costs by purchasing powdered milkshake, for example). The film also suggests he was fed up with the lack of money he was making from the deal. In the end, he wriggled his way around the contract by setting up the property company “McDonald’s Corporation” and buying up the land on which the franchises were built.


Ray Kroc, as depicted in The Founder. Photo: The Founder

Kroc ended up buying McDonald’s in 1961, for $2.7m. He gave the brothers $1m each and agreeing to an annual royalty of half a per cent, which the McDonald family says they never received.

“My father told us about the handshake deal [for a stake in the company] and how Kroc had gone back on his word. That was very upsetting to my grandfather, and he never publicly spoke about it,” McDonald French says. “It’s probably billions of dollars. But if my grandfather was never upset about it enough to go after the Corporation, why would we?”

They lost the rights to their own name, and had to rebrand their original restaurant “The Big M”. It was soon put out of business by a McDonald’s that sprang up close by.


An original McDonald restaurant in Arizona. Photo: Flickr/George

Soon after that meal when the 11-year-old Jason saw Kroc smiling down from the plaque for the first time, he learned the true story of what had happened to his grandfather. “It’s upsetting to hear that your family member was kind of duped,” he says. “But my grandfather always had a great respect for the McDonald’s Corporation as a whole. He never badmouthed the Corporation publicly, because he just wasn’t that type of man.”

Today, McDonalds' corporate website acknowledges the McDonalds brothers as the founders of the original restaurant, and credits Kroc with expanding the franchise. The McDonald’s Corporation was not involved with the making of The Founder, which outlines this story. I have contacted it for a response to this story, but it does not wish to comment.

***

Dick McDonald’s principles jar with the modern connotations of McDonald’s – now a garish symbol of global capitalism. The film shows Dick’s attention to the quality of the food, and commitment to ethics. In one scene, he refuses a lucrative deal to advertise Coca Cola in stores. “It’s a concept that goes beyond our core beliefs,” he rants. “It’s distasteful . . . crass commercialism.”

Kroc, enraged, curses going into business with “a beatnik”.


Photo: The Founder

Dick’s grandson agrees that McDonald’s has strayed from his family’s values. He talks of his grandfather’s generosity and desire to share his wealth – the McDonald brothers gave their restaurant to its employees, and when Dick returned to New Hampshire after the sale, he used some of the money to buy new Cadillacs with air conditioning for his old friends back home.

“[McDonald’s] is definitely a symbol of capitalism, and it definitely sometimes has a negative connotation in society,” McDonald French says. “If it was still under what my grandfather had started, I imagine it would be more like In'N'Out Burger [a fast food chain in the US known for its ethical standards] is now, where they pay their employees very well, where they stick to the simple menu and the quality.”

He adds: “I don’t think it would’ve ever blossomed into this, doing salads and everything else. It would’ve stayed simple, had quality products that were great all the time.

“I believe that he [my grandfather] wasn’t too unhappy that he wasn’t involved with it anymore.”


The McDonald’s Museum, Ray Kroc’s first franchised restaurant in the chain. Photo: Wikimedia Commons

Despite his history, Dick still took his children and grandchildren to eat at McDonald’s together – “all the time” – as does Jason McDonald French with his own children now. He’s a cheeseburger enthusiast, while his seven-year-old youngest child loves the chicken nuggets. But there was always a supersize elephant in the room.

“My grandfather never really spoke of Ray Kroc,” he says. “That was always kind of a touchy subject. It wasn’t until years later that my father told us about how Kroc was not a very nice man. And it was the only one time I ever remember my grandfather talking about Kroc, when he said: ‘Boy, that guy really got me.’”

The Founder is in UK cinemas from today.

Anoosh Chakelian is senior writer at the New Statesman.