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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

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Good riddance to Boris – but the Tory party still needs to find a unifying leader

With Boris gone, Theresa May and Michael Gove are serious contenders for the crown.

UPDATE:  From the moment Michael Gove decided to run for the Conservative leadership Boris Johnsons days were numbered. This is particularly true because of the typically unequivocal comment that Gove made about Johnsons leadership capabilities or lack of them in his announcement. For Johnson has led a remarkably charmed life in both politics and journalism in recent years. Reality has finally caught up with him. It was always going to be the case that if Gove stood many who had pledged their allegiance to Johnson would, because of this lack of leadership qualities, think again. The inevitable has now happened, and Johnson, for once, has accepted reality.

Michael Gove appears, at the eleventh hour, to have learned something about Boris Johnson that anyone who has worked with him either in journalism or politics could have told him years ago: that Johnson is entirely unreliable. The leaked email in which Gove’s wife, Sarah Vine, warned him of the assurances he needed to get from Johnson before pledging himself as the key supporter in his campaign turns out to have been the writing on the wall for a clear run for Johnson. Word was swirling round Westminster after the email was leaked that Johnson appeared to have offered the same senior cabinet post – believed to have been the Treasury – to more than one person in return for support. Perhaps this was down to incompetence rather than dishonesty. Gove has made his own judgement, and it is, for an intelligent and serious man, an inevitable one.

Many Brexiteers, who feel that someone who shared their view should end up leading the Tory party, will be delighted by Gove’s decision. There was deep unease among many of them about the idea of a showman rather than a statesman inevitably ending up in Downing Street. What Gove will need to do now is to persuade colleagues who had gone behind Johnson because they did not want Theresa May to shift behind him. Some of Johnson’s supporters caused enormous surprise by their decision – such as Sir Nicholas Soames, who spent the referendum campaign denouncing Johnson on his Twitter feed – and they are not natural bedfellows of his. One Tory MP told me before Gove’s decision to stand that a group of “sensible” Tories had accepted the inevitability of a Johnson victory and had decided to get around him to try to keep him on the straight and narrow. The view that Johnson is unstoppable has now been tested, and those who had made the leap to support him may now well leap back.

Following Theresa May’s very assured launch of her campaign, which radiated statesmanship and sincerity, the Brexiteers need to ask themselves what sort of candidate is going to provide the best challenge to her, for she is clearly formidable. Given the choice between a volatile buffoon taking her on or someone who is more level-headed and serious doing so, the latter must inevitably be the best option. Johnson never looked like a unifying figure, and certainly not one it was easy for rational people to imagine leading the country in an international context.

Gove’s decision not to support Johnson does not merely withdraw his personal support. It will withdraw the support of many who were prepared, reluctantly, to follow his lead and join the Johnson campaign. It has a parallel in history, which was William Hague’s decision to run on his own account instead of supporting Michael Howard in the 1997 contest after the party’s annihilation by Tony Blair. Hague won, and turned out to be a hapless leader. Gove is made of heavier metal and the party is in less perilous circumstances, so the outcome for him, should he win, ought to be better.

In the past few days a considerable portion of the Tory party has taken leave of its senses. In such a condition, envisaging Johnson as its leader was easy. Sanity and calm are now prevailing. The Brexiteers in the party – or at least that group of them resolute that they cannot have a Remainer as leader can now reflect on whether they want an act or a politician to become prime minister. At least, thanks to Mr Gove, they now have a choice.

The Johnson phenomenon

Once upon a time, often within hours of a prime minister resigning, a “magic circle” of Tory grandees would decide after “soundings” whom to send to Buckingham Palace to kiss hands as the new man. Now, the 1922 Committee of Tory backbenchers has sought to do what it can to emulate the process, fast-tracking the election of David Cameron’s successor so that he or she is in place by 9 September, and ignoring calls for a period of wider reflection on whom the party needs to take it forward through the uncharted waters of negotiating an exit with the European Union. Longer consideration may have been helpful, given that the party is choosing not merely its leader, but the next prime minister.

It soon appeared the main fight would be between Boris Johnson and Theresa May. Jeremy Hunt proposed himself as a “second referendum” candidate, even though the Tory party in particular wants another plebiscite about as much as it would like to put its collective head in a mincer. There was talk of two lesser cabinet ministers, Stephen Crabb and Sajid Javid, presenting a “joint bid”, even though such a concept is unknown to the Conservative constitution; and others were floating around the margins. The tumult reflects the hysterical state of mind in the party: no one in Cameron’s inner circle expected the British public to disobey orders, including, one starts to imagine, Johnson. It is only the preposterous events in the Labour Party that have stopped the Tories from seeming to be completely out of control.

It has become Tory party lore that the favourite never wins, on the precept that he who wields the knife never ends up wearing the crown. Many of the Tory MPs believed nothing could prevent their colleagues voting in sufficient numbers to put Johnson in the second and final round of the contest, the one in which all paid-up members may vote. And if he got there, they felt, the outcome was even less in doubt: he would win.

Predicting this will happen and wanting it to happen are, of course, not the same thing. A distressed Tory MP told me he expected Labour sympathisers to join his party to vote for Johnson, rather as mischievous Tories joined Labour to elect Jeremy Corbyn. The rules, however, forbid such last-minute purchases of a vote: yet the sentiment shows what an equally substantial group of Tory MPs thought of Johnson’s capabilities, and explains why the anyone-but-Boris movement sprang into action the instant Cameron ran up the white flag. They knew that, for all Johnson’s failings, and there are many, he has the entertainer’s knack of making people love him. Sadly – and this is the part his adoring public doesn’t see – things can be very different when he enters his dressing room and starts to take off the make-up. As Sir Alan Duncan said forthrightly last weekend, there is the small matter of Johnson lacking the gravitas and experience to be a credible prime minister, something MPs should have the wit to take into account even if the party in the country at large does not.

The Johnson phenomenon is not the least reason why even some of Cameron’s most consistent critics did not call for him to resign if he lost the referendum. The more time the Tory party had to consider Johnson as a potential leader, and what that entailed, the better. Some MPs are angry that Cameron did not take immediate responsibility for cleaning up the mess he had helped make and preside over the exit negotiations. His colleagues feel he simply couldn’t be bothered, which is consistent with the often idle way he ran both his opposition and the government – an idleness that prevented him putting any contingency plan in place. The grand gesture, the great claim and the sweep of rhetoric are very arresting, and take little time. Following through is harder: but Cameron has a long record of not considering the consequences of words and actions, and this debacle for him is the ultimate, and most spectacular, example.

The pessimism that Johnson’s detractors felt about stopping him rested in what they knew and saw of the self-interest of their more bovine colleagues. The first concern of one group is to back the winner, and they came to think that would be Johnson (something with the status, in those circumstances, of a self-fulfilling prophecy). They also thought that should Labour find a new leader and become a serious opposition, Johnson was the man most likely to win an election. Whether that would come next spring – if the new leader sought a new mandate as Gordon Brown did not in 2007 – or in 2020, as the Fixed-Term Parliaments Act decrees, is a separate but important question. Johnson’s acolytes let it be known he would not call an early poll. He (or any other leader) would be absolutely constitutionally justified in not doing so. More to the point, you do not plot from the womb to become the Queen’s first minister only to risk chucking away the key to the Downing Street drinks cabinet after a few weeks. However, a weakened Labour Party may prove an irresistible target, and Tories recall how history would have been different if Gordon Brown had gone to the country in the autumn of 2007, as many urged him to do.

The press – and not just on the left – could well have given Johnson a hard time. His baroque private life has exhausted its capacity to shock, but there is scope to scrutinise his record of underachievement as mayor of London; or Michael Howard’s sacking him for lying; or the Times sacking him for making up quotations (from his godfather) in a story; or his offering to assist his old schoolfriend Darius Guppy in having a journalist who had disobliged Guppy beaten up. 

The manoeuvring May

Theresa May’s ambitions have been barely concealed. She has been “on manoeuvres” since the 2015 general election. She worked out that the best way to manoeuvre during the referendum campaign was to say nothing, to avoid becoming a divisive figure. Aside from some rare moments of half-hearted support for Remain, that is exactly what she did. Had she gone the other way, the leadership contest might have seemed closer, because her seniority and experience would have matched Johnson’s charisma. As it was, until Johnson pulled out, the best her colleagues believed she could hope for, barring some dramatic development, was to come second. A Times poll on Tuesday said that Tory voters preferred her to Johnson, which had the smell of accuracy about it. Activists – those with a vote – are a different matter. They appear in no mood at the moment to elect a Remainer.

Yet they are in some measure in the mood to elect a unifier. For all his attempts at sober statesmanship since the vote, Johnson (given his past) would have had to stretch credulity even more than usual to convince as one of those. The anyone-but-Boris movement has been motivated by the list of his perceived offences and character defects. Few believe he would have plumped for Leave had he thought it would lose: Johnson’s years on the rubber chicken circuit, and his mailbag from Telegraph readers in the provinces, made him more aware than most of his metropolitan colleagues of the true nature of public feeling outside the bubble. He is seen as utterly flexible in terms of principle: and, from the nature of his campaign rhetoric, as disloyal, cynical and lazy. Critics recall the number of deputy mayors (seven at one point) he required to do his last job. He is widely considered untrustworthy.

Perhaps he could have unified activists who seem near universally to admire his carefully manufactured persona: he would have found it harder to unify the parliamentary party, and would probably require a resounding general election victory before doing so. Even then, doubts born of years of witnessing his buffoonery and prevarication would be hard to allay.

The unifiers

MPs felt that two other Brexiteers had far better credentials as unifiers. The most obvious was Michael Gove, whom some tried to persuade to stand; but until today Gove had signalled his willingness to throw in his lot with Johnson.

The other increasingly discussed name in the days after the referendum was Andrea Leadsom, the energy minister and, before that, economic secretary to the Treasury. Many even in her own party never thought of her as a potential leader until recent weeks: but these were weeks in which she showed her key virtues. She is intelligent and capable. She had a long career in business before entering government, and presents a happy contrast to ministers who spent their lives as special advisers before gracing the back benches. Leadsom is deeply principled but also reasonable: she abstained in the vote on same-sex marriage because she did not want to show a lack of respect to homosexuals and lesbians who wished to solemnise their relationships, but she could not support the notion because of her religious views. Remainers consider her to have performed uniformly well in debates and television interviews during the EU campaign, because she avoided personal attacks, spurious claims and wild threats.

She is popular with her colleagues. However, if she has let her name go forward she will start from the back of the field. It would require the sort of organisation that enabled Mrs Thatcher to beat Ted Heath in 1975 if she were to pull this off. However, should Johnson implode during this campaign, and she had become a candidate, she would be fabulously well placed to pick up his voters.

May would seem to be way ahead as the Remain candidate, but will have to earn that position in the hustings that will run over the summer. The dark horse is Stephen Crabb, who replaced Iain Duncan Smith at Work and Pensions, in league with Sajid Javid, a secret Leaver who called it wrongly and who is now trying to salvage his future. A self-deprecating man from a humble background and with few enemies, Crabb, who was previously Welsh secretary, reminds me of John Major, who was brought into the cabinet and rose rapidly. In a leadership campaign held in the middle of a parliament, Major won and became prime minister, trading heavily on a backstory of his unprivileged upbringing. He may be the man May must beat.

George Osborne has ruled himself out but remains relevant. He wants to carry on in government and, like the overgrown student politician he is, may be about to make an accommodation with those he has denounced for months in order to continue to hold a senior post. Also, not least because of Cameron’s laziness and casual attitude towards his party, he had exercised a substantial and growing influence over patronage and especially over senior government appointments. He had made a point of getting to know MPs on the way up, not least because he expected to be prime minister and wanted to be sure he had a clientele of loyalists to support him. He was starting to appoint his ministerial team, in effect, before becoming prime minister.

Osborne’s prospects have crashed, but his machine remains, for the moment, intact. If he has chosen wisely, he has a group of loyalists whom he can deploy in support of the candidate he chooses. However, now he can be of no use to his clients, it will be interesting to see whether they take the blindest bit of notice of him.

There was talk of Johnson making him foreign secretary, which would show an advanced sense of humour, given the role that person might have to play in the exit negotiations. Gove, if he had thrown in his lot with Johnson, might have ended up as chancellor.

The party is so fractious that the next nine weeks could provide a roller coaster: any talk of going back on the idea of strict border controls, for instance – something Johnson hinted at – could cause huge turbulence. I suspect we are about to find that conducting a leadership contest at any time is a project laced with tension; to conduct one in a climate of scarcely concealed hysteria is not least why anything could yet happen.

Simon Heffer is a columnist for the Daily and the Sunday Telegraph

Simon Heffer is a journalist, author and political commentator, who has worked for long stretches at the Daily Telegraph and the Daily Mail. He has written biographies of Thomas Carlyle, Ralph Vaughan Williams and Enoch Powell, and reviews and writes on politics for the New Statesman

This article first appeared in the 30 June 2016 issue of the New Statesman, The Brexit lies