The London Paper’s City Girl Weighs in on Banker Bonus Caps
by Barbara Stcherbatcheff, author of “Confessions of a City Girl” (Virgin Books)
Since I revealed my identity as The London Paper’s “City Girl” on August 3rd, I have been besieged by media requests to share my opinion on what must be the year’s hottest City-related story: whether or not to cap banker bonuses. Politicians have this idea that, if they can remove the upside reaped by the financial masters of the universe, they can remove the downside they’re capable of digging as well. As a result, new ideas on pay structures, including deferrals, clawbacks, and even the elimination of guaranteed bonuses, are being tossed around to ensure City compensation practices are aligned with long-term financial stability.
These ideas, while well intentioned, are problematic in several ways. First and foremost, common sense tells us that the eradication of the City’s bonus culture seems about as likely as the eradication of futures or options. When I was a derivatives trader in the City, our year-end bonus was such an integral part of our lives, it became an obsession. I listened to my colleagues describe precisely how they would spend their bonuses on the finer things in life— champagne, sex, gadgets, or an endearing mixture of the three. Like most bankers, we aspired to make as much money as possible in the shortest period of time. And like most bankers, many of us actually did.
This wild, bonus-fuelled consumerism is an image that the media likes to point to as an example of the unrestrained greed that characterizes your typical investment banker. As bankers were labeled “Public Enemy No. 1,” “bonus” became a dirty word, taking on an air of illegitimacy and excess at a time when people were losing their jobs, homes and their life savings.
But not all bankers in the City are freewheeling, promiscuous hedonists. Indeed, the vast majority of them will spend their bonuses not on strippers and champagne, but on a mixture of three quite boring things: family holidays, school fees, and home mortgages. The majority of the non-bonus receiving public may understandably resent the fact that bankers receive this annual perk, but the bottom line is that most of these people are extremely intelligent, hard-working individuals, many of whom hold Master’s degrees and PhDs. They are not doing average jobs, and should not be compensated in an average way. If politicians render bonuses unattainable, why bother working in the City at all?
Capping bonuses will cure the symptoms of this crisis, but not the disease. Chancellor of the Exchequer Alistair Darling got it right when he stated, “If we simply concentrate on bonuses, we’ll be making a big mistake.” The G20 ministers would struggle to make their principles enforceable. Shaun Springer, the chief executive of remuneration advisory firm Square Mile Services, stated, “The holes in their thinking are cavernous.”
France and Germany have been exceptionally determined to curb bonus payments. Of course, it makes sense that two countries that never fully benefitted from capitalism in the good times would be the first ones to pass laws that would frustrate their more entrepreneurial, Anglo-Saxon rivals in the bad.
Ultimately, a world with bonuses is preferable to one without. We need our City’s brightest people working hard in order to get this economy going again. Most high-earners I know are willing to go that extra mile—an extra ten hours or more a week, for instance—with the goal of earning a healthier annual perk; most wouldn’t lift a finger if this amount was capped to only 10% of what they earned the year prior.
Not many bankers I know are too stressed about bonus caps because they know – deep down – that a lot of these proposals are not only unenforceable, they’re undesirable. Britain is unique in that financial services industry is the engine of the economy. Politicians understand that we’re all interconnected: when it comes to international finance, we sink or swim together. When it comes to bonus caps, politicians wouldn’t dream of cutting off their nose to spite their face.
Hi City Girl
Whilst I completely agree with the sentiments you expressed I think there is another element that needs to be highlighted. The City employs 1.2 million people with a further 1.6 million worker dependent upon the organisations based there (services, back offices etc) not to mention their families. The City also generates a trade surplus of around £45 billion per annum as well as bring ing numerous other benefits to th UK as a whole.
What benefit is there in bashing bankers or banks? Why are we grilling our golden goose? Certainly there are faults in our system but we – the human race – learn by its mistakes. We are forever destined to a boom and bust cycle if only because of mankind’s ability to innovate. On the plus side this results in the civilising of our world and, say, the eventual cure for cancer. On the downside it means someone will always figure out a new product that cirumvents the system and results in a ‘bust’.
But the near collapse of our banking system was not the fault of bankers. It was the fault of the system that the politicians and the regulatory authorities created. If your bank had not invested in high risk products then your pension fund would have kicked out its CEO for failing to take maximise returns! Rating agencies and the entire world in which they evolved has been discovered to be flawed in its very DNA. Sure there were/are greedy bankers. Certainly there were divisions within banks that acted immorally. But are we to throw the baby out with the bathwater?
The City, its workers and its institutions are invaluable to the people of this country. Why, when we don’t believe a word the politicians say, do we choose to believe them when they whip the City? 1 person in a million gained from the crash (and I certainly wasn’t one of them) and we all suffered. So I do wish the world would grow up and get used to the fact that sh*t happens. Get over it and get on but don’t cook the one thing that is doing well for us. The City is and has been for 2000 years this country’s golden goose. We hurt it, then we hurt ourselves.
Kind regards
Shaun Springer
C.E.O.
Square Mile Services Ltd
Shaun, I don’t think she is suggesting we scrap banking but you will die like the dinosaurs if you think things can or will go on like the have
in the words of bill gross of pimco “if you are a child of the bull market, it’s time to grow up”
I now live in Caracas but having seen a lot of the ways of the City up close, I feel somewhat qualified to comment. I used to be an I.T. Director for many years in several different institutions in the City and later in New York.
The argument that some people should earn obscenely large bonuses because somehow they’re so special, or in part because they have Master’s and Phd degrees, really beggars belief and insults our intelligence! Many, many important scientists, doctors and other key workers have these qualifications and more, but they have no chance of attaining these kinds of salaries or bonuses. Our world is out of whack. If the city was so very important why is our (and the world) economy in the hole? We need a new form of capitalism if we are to stick with that economic model for financial and social progress. It is also true many bankers have few if any such qualifications – I even met some who had no banking exams but were part of an old boys club!
By the way I hate to be the class ‘smart-ass’, but if City Girl is so smart herself she may wish to review her high school history and geography – Germany is where the Anglo-Saxons originated, doh!!!
Shaun Springer sounds equally ignorant – how condescending of him to tell people who use their democratic freedoms to question things, to ‘grow up’!! But of course we must suppose that he has to defend City excesses, since he has a vested interest in perpetuating the staus quo and certain time-honoured ways…! Mmm..
The days did exist when bankers actually shared certain imprtant moral values with other citizens, and were revered as upright and decent members of their communities. Since the 1980s no longer so, I fear. The bankers are not entirely to blame of course – they have been the happy recipients of such bonuses, allowed to go unchecked by government and regulatory bodies, which have let society down BIG TIME. But the City cannot go on selfishly demanding that they are entitled somehow, that they alone are qualified to enjoy such enormous privilege, when it was the promise of excessive bonuses that often led to very risky and poor trading / financial decisions. Balance is what most people want to see restored. There has to be a link between LONG (not short)-term performance and the right to a reasonable and well-deserved bonus.
I’m perfectly OK with bonuses – but there is no reason for someone to take home bonuses well in excess of compensation. The Dutch have capped bonuses at 100% salary. And really, isn’t that enough?
The real issue I have though, is that even when it was obvious the issues that were caused, they still received the sizeable “bonuses” for the reasons mentioned (school fees, outrageous mortgages). It was treated as an “entitlement”.
If it is “entitled” then it should be straight salary, taxed as such, bottom-lined to the company as such. If not, is should be treated like the discretionary that it is. Bad year in banking? Everyone from the executive assistant on up takes the hit. After all, if you’ve spent every penny of your salary every year and have no cushion, then really, how good of a banker are you?