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Bank bail-outs and bonuses: Do the two mix?

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6th Nov 2009
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This week the government doubled its investment in bailing out the already part nationalised RBS and Lloyds Banking Group, injecting a further £37bn into the ailing banks. With the taxpayer footing the bill for one of the world’s biggest government rescues, the issue of bonuses has reared its ugly head once more.

As part of the new deal, the government sought pledges from the banks that staff earning £39,000 p.a. or more would not receive cash bonuses, and executive directors would have bonuses deferred for three years. Despite the proposed ‘crackdown’, pay experts and politicians remained unconvinced. “This is all hot air. This has nothing to do with risk management and everything to do with populism”, Liberal Democrat shadow chancellor Vince Cable told the Financial Times.

"Bonuses are very definitely back, and there’s a very strong reaction against them, but I think the financial service sector does rely very heavily on them and the debate is not about getting rid of them, it’s a question of the management of bonuses; in other words, ensuring they are attached to the right performance criteria, that they’re not excessive, do not distort risk-taking and possibly caps", said The Work Foundation’s Stephen Overall in an interview with our sister site HRZone.co.uk this week.

“The‘social usefulness’ of some of these complex financial instruments which are often linked to bonuses should also be assessed. I don’t think anyone in any seriousness is suggesting scrapping bonuses. Life is just not like that. The time is ripe for a real move to better management, probably reduce the scope, and reduce them", he added.

A 'marathon' effort
RBS chief executive Stephen Hester said the ban on paying bonuses in cash or shares imposed in February had now been loosened to allow share-based bonuses. The other pay commitment – that executive directors at both banks have the entirety of bonuses deferred for three years – applies to only eight people.

Hester, who was brought in to replace the disgraced former chief executive Sir Fred Goodwin, said he was hopeful the bank would return to profit in 2011, but it would be a slow process: “I have repeatedly said this is a marathon, not a sprint, and so it is proving”.

He also insisted he was “crystal clear of having responsibility for stewardship of the investment made by the taxpayer”, adding that the bank was “very clear we would like to get the government out of RBS at a profit”.

Walking a 'tightrope'
At a hearing before the Treasury Select Committee, UKFI – which oversees the government’s stakes in the banking sector – admitted that it was ‘walking a tightrope’ by seeking to limit bonus payouts at recovery banks while trying to stop talented staff leaving.

“We have to walk this tightrope in which we reform the cultures…but we cannot afford to be in a position where the banks lose so many people that we start to lose serious value”, said outgoing chief executive John Kingman.

Kingman insisted that UKFI's holding in the banks over time would be sold at a profit and that he expected there to be ‘healthy interest’ in the assets to be sold by RBS, Lloyds and state-owned Northern Rock.

Created at the end of last year, UKFI will now hold 84% of RBS on completion of the rescue deal announced this week. It has 43% of Lloyds, owns Bradford & Bingley's loan book and will own Northern Rock from the end of this year.

UKFI would not reveal the size of the RBS bonus pool, which will be released in the form of debt and shares to staff over time. They will be able to sell their interest in those shares when they are released to generate cash. Mr Hester said the rescue package was "a giant step forward for RBS and our people".

A better deal?
"I believe what we have here is a better deal for the taxpayer", chancellor Alistair Darling told the BBC following the announcement of the bail-out.

However, Conservative shadow chancellor George Osbourne insisted: "Let's not miss the elephant in the room. The government is having to put another £39.2bn of taxpayer's money into the banks - a bigger bail-out than the original bail-out last autumn. Yet still there is no guarantee that it will get credit flowing in the economy".

The Treasury's financial services secretary Lord Myners was also sceptical of the plans, telling reporters that RBS was "the worst managed major bank this country has ever seen".

 

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By 1582631
06th Nov 2009 13:38

Bank bonuses

Every article that mentions bank bonuses anywhere in the western world makes reference to retention of talent as the main purpose of keeping bonuses.  Just where exactly is this 'talent' going to go? Are we not hearing of thousands of banks, stock-brokers and finance graduates on the dole? I think it's worth the risk! Let them go!

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By User deleted
06th Nov 2009 14:42

I agree!
I agree - where is all this "talent" going to go if they don't get their bonuses? The traders could probably sell cars or work at estate agents but the rest of them do not have any skills that could work in other industries. This is blatantly the old boys club protecting themselves from being exposed as just ordinary people who only deserve ordinary compensation. The banking system will not collapse if we stop paying excessive bonuses, we can manage to run a much more important industry, the NHS, without paying extortionate sums of cash. It's time we removed the shroud of secrecy that hangs around the banking industry.

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By dennismiller
06th Nov 2009 15:02

But where has all the profit come from!

Paying bonuses is all very well, or not, as the case may be, but I am not clear on what 'profits' these bonuses are being paid. If these profits are so enormous that substantial bonuses can be paid, why have these profits not been ploughed back into the business as a 'bale out'

And where has all this 'profit' come from? Have the banks been selling things, have they been trading in things (or imaginary things) or have they been printing it? In my feeble-minded way I always assumed that if someone has made a profit, then someone has made a loss, or at least paid out for something i.e. an exchange of money has taken place. So, who has made the loss or paid the money?

I suspect, like in so many things, it is us lowly taxpayer who has footed the bill!!

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By Christian
14th Dec 2009 09:28

bank bail out

Year 20029 can be considered the worst year among businesses for there were many bank failure reported consequently the government did not  fail to extend bailout to the trouble financial institution and it awakened the mind of the tycoons to adapt a conservative investment. However, to keep from losing a lot of money, you need to know the basics of investing before trying to invest online.Traditionally, buying stocks through a broker meant pinching and saving your pennies for many years before being able to invest in the stock market. If you didn't have enough money to start already if you wanted to start quick, you needed to borrow money or buy stocks on credit. This is also called "buying on the margin.” With the ease and convenience of the World Wide Web, however, the playing field has been leveled, allowing most anyone to enter the stock market with less money than before.
 

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