I worked for eight years in derivatives on a trading floor. Even as a former banker, whose remuneration in the 1980s and 1990s was very dependent on bonuses, I have to agree with the anti-bonus argument, and I agree with much of what was said by Mark Field. Those arguing for the bonuses make various points. Some say that bank employees in divisions which were or are profitable should not have to carry the can for those who came close to bringing down their institutions. Others argue that ending all bonuses would merely leave good quality and productive employees to seek a job in another (e.g. non-UK) bank, at a time when our banks need to keep hold of productive and revenue-generating employees (and it is worth remembering that the 12% coupon on the Government's preference shares has to be re-paid somehow). One also needs to bear in mind that in the case of many employees, the so-called "bonus" is something of a misnomer, as it can constitute a very significant percentage of the total compensation. A "discretionary element of the salary" might be a more accurate description.
A lot has been said in recent days on banking bonuses, including two interesting posts on CentreRight from Mark Field and Andrew Lilico yesterday. We have heard condemnation yesterday from leaders of all three political parties for proposals from some of our state-owned banks to pay substantial bonuses.
Nevertheless, I believe there is a stronger, long-term argument here to oppose these bonuses. My reasoning is slightly different to Mark's, and I am seeking to look beyond the current political row in 2009 to look at how we might fix our broken banking system in the longer term. One of the weaknesses I saw when I was in the industry was a lack of corporate loyalty or even corporate involvement on the part of many on the trading floor. The average tenure at an individual bank for traders and salespeople is around three years. Moving between banks was incredibly easy - in comparison to moving between, say, many commercial rivals in other industries, there were no relocation costs, little disruption, and in practical terms it was normally very easy to move from one bank to another. Indeed, one would get calls from head-hunters almost on a weekly basis making offers to do precisely that.
There isn't space here to explore a whole set of reforms to our banking culture, but one of the areas we need to look at is amending the recent culture of encouraging the primacy of the individual (or his or her team) over the corporate whole. I left the industry in 1997, but at that time this culture had already taken on absurd extremes. In the derivatives unit of the major bank I worked for in the early 1990s, there was an active encouragement from the heads of the unit not to co-operate with other divisions. If one were sent to a meeting of principal heads of other divisions, there was an unwritten rule amongst the derivatives personnel in the 1990s of "don't ask, don't tell" - in other words, if you don't ask how other divisions are performing, then one wouldn't have to tell them how much money was being made in derivatives! Many trading floors were (and doubtless still are) like silos where each area behaved rather independently of each other - more like a shopping mall than a department store. Yet when the mall falls down, every store will close.
As politicians, we should avoid being involved in micro-managing any industries. Nevertheless, one of the messages we need to send is that bank employees across all sectors need to start behaving more like a corporate whole, that their individual performance is dependent on ALL of the firm, the team and the individual. In recent years, trading floor staff in particular have behaved too much like a set of contractors, not as a group of key employees, where rewards need to match not only risk but also, more importantly, responsibility. In this case, it is responsibility for the corporate whole, not least as it is this corporate whole which the taxpayer has now rather unwillingly taken onto its books.
