Geoff Kates

Managing Director, Lepus

Hello,

Unfortunately, bank-bashing season began again with the recent disclosure of year-end financial results and, more importantly in the eyes of the public, bankers’ pay packages.

Stephen Hester, Chief Executive of RBS, after being heavily demonised for being considered for a bonus just short of £1m, has been shamed into foregoing his bonus for the second consecutive year. Meanwhile, John Hourican, head of Global Banking and Markets of RBS, seems to be keeping his (approximately) £4.4m bonus without facing any public ire. Witch-hunts are, it seems, selective in their specific targets. Cases like those of Stephen Hester, however, are used by some in the media to generate a mob-like mentality against bankers and the banking industry in general. As has been evident many times throughout history, in times of trouble a scapegoat is found. Whilst it’s true that some approaches in the banking industry provided the initial impetus that sent the world spinning into global economic chaos, no one person, institution, industry sector or nation-state is wholly to blame.

Human resource economics holds that there are several variables that determine the level of pay of an employee. The most significant is that of a person’s marginal value to their employee’s organisation. Truly talented individuals, who drive up the value of a firm (or limit its losses in times of dramatically shrinking GDP), demonstrate their worth and should be paid accordingly. The monumental sums earned by some sportsmen, who, interestingly, are still held in high esteem by the public regardless of their exorbitant pay, are being paid relative to their prodigious marginal value as their individual talents funnel enormous revenues into the clubs coffers. In the banking sector, in times of financial crisis in particular, talent is especially needed to protect against further losses, and the high marginal values of talented individuals benefit not only their own organisations but the wider economy as well.

No one disputes that close scrutiny of the industry, and its governance and processes, is warranted by the financial contagion realised from 2008 onwards, but banks have been busy cleaning up their act since the crisis first hit. The interconnectedness of the industry, and the sheer size of the organisations in question, means that this is a long drawn-out process, but individual contributions that will hasten and improve industry performance in the long run still deserve to be recognised. The main issue is that there is an entrenched culture of the pursuit of short-term gains at the expense of long-term performance in the banking industry, and it is this culture that needs reform, not the absolute pay or bonus levels themselves. Credit Suisse made one step towards linking pay to longer term, risk-adjusted performance when it decided to award its staff in the form derivatives. It is, however, doubtful if the public and politicians will be appeased by these measures, whose entirely misplaced focus is on the value of the compensation, not its structure, which is where reform is needed for a more stable financial system.  

In an interesting spin on the demonization of the banking industry, the European Union are planning to invoke a financial transaction tax. Mr Sarkozy, France’s misguided President, whose popularity with the French public is on the wane, has enthusiastically adopted this idea, stating that, whether the EU parliament enacts this piece of economy-reducing legislation or not, France will include it on their statute books. Mr Cameron, our own visionary leader, has said that refugee bankers from France would find a warm welcome in the UK. Indeed, attracting the best and the brightest from around the globe has been a talent of the British since time immemorial.

Sincerely

Geoff Kates