Are Bankers Bonuses Justified?

"financial crisis", "banking", "bonus culture", "bankers"

The answer of course is never as simple as a yes or a no!  The question comprises of a highly convoluted set of circumstances and factors that some bright academic one day might use to write his doctorate. You’ll know who he is by the one who everyone will be avoiding sitting next to at a dinner party.

First let’s remove the political bandwagon from the question.  Here’s how I imagine a conversation went in either a Coalition or Labour Party PR meeting:

MP1 : We need more votes.

PR Man: Well, OK what we need is something all the public are angry about then jump on that and promise to support them to the hilt and be equally angry.

MP2: Like the expenses scandal?

PR Man: Yes but their anger directed at someone other than us.

MP1: Then we’ll get more votes?

PR Man: If the public see we’re as angry as they are and promise to change it, then yes.

MP1: Won’t they see through that?

PR Man: Maybe but they’re too angry to notice.

MP2: But isn’t the government in charge meant to ensure the mess doesn’t happen in the first place and ensure economic stability? Isn’t it kind of our fault as well?

MP1: You just don’t understand politics do you. Bankers witch hunt it is……

I not suggesting the banking community are blameless in any way, shape or form. Some were reckless, in cases,  some were greedy and had no proper self-regulation or forethought about the future. Some however were very good at their jobs and through no fault of their own found themselves in a global economic meltdown. So let’s not drown them all just yet and burn them at the stake. The last thing I want to see is small children walking around dressed in smart pinstripe suits on Halloween.

I could go on for pages and pages describing how bonuses can and cannot be justified. Neither of us want that! So I’ll try and be as brief as possible, providing an simple overview.

Firstly, the bottom line is that bonuses are performance related pay and part of the remuneration package in many different businesses in the UK and around the world. From call centre staff and sportsmen, to management, it’s an accepted part of many different professions.

Now let’s remove the amount of the bonus from the argument. Note, I’m not talking justification yet, just taking the amount of it. The bonuses awarded to bankers are in some cases a huge amount of money to you and I, millions,  some might say an obscene amount. (Or in my new currency: one Tamara Ecclestone bathtub) It’s an amount that you and I can possibly only dream of earning.

Does the amount make it wrong? No, I don’t think so.  If that’s part of an agreed pay package and comparable in that line of work then that in itself can’t be wrong.  A top footballer can earn £1 million a month. Is it an immense amount of money? Yes. Is it fair? Maybe. Is it wrong? No, it’s part of an accepted part of our capitalist society and it’s better than the alternative (another debate that we won’t go into now). I’m not suggesting that they’re the same thing or comparative jobs. I mean I have no idea how well a banker plays football… probably really rubbish and so they would end up playing for Wolverhampton Wanderers.

Should a banker be rewarded for individual performance even if the company is failing or in serious debt? Let’s take a different example:

I’m the top call centre agent and have to achieve 100,000 sales in a year in order to get a 20% bonus of my salary.

Now let’s run through some questions:

If I achieve my targets and through no fault of my own the company is doing badly, should I still get the bonus?

If the company through external pressure refuse my bonus I worked really hard for, what incentive is there for me to perform at my best in the future or even stay at the company?

If the agent performed actions that were reckless and put the company at further risk to achieve that bonus should they still have it? Should they be fired?

A few questions to think about there and banks have to be careful in future that their targets set for bonuses do not force or encourage reckless activity in order to achieve them.

The governments around the world need to put into place more rules, regulations and controls to ensure the global banking crisis never takes place again. The banks in turn need to ensure that their bonuses and targets reward sustained stable growth and profitability.

Do we, the public, have a say in bankers bonuses?

A bank is a business. A business is owned by shareholders. The directors of that businesses have a duty to the shareholders and to run that business profitably. It is the shareholders that have certain power and rights over that business and can, if there are enough of them call votes, if necessary to change that business.

For banks such as RBS and Lloyds we all are now part shareholders. So do we have a right to speak against the bonuses awarded? Yes we do, its our money invested in those banks. However the great economic genius of their time, my grandmother, once said ‘don’t cut your nose to spite your face.’

The thing about a banker witch hunt is that they will often drown an innocent banker and one that could be the ideal candidate to get us all out of the crisis quicker and on the road to recovery. What people have to remember is if we want them to perform to the best of their ability we have to offer incentives, like their competitors will be doing. If we don’t do this and in some cases publicly force them to give up their bonus, then, like workers in any businesses, like you or I, they will look elsewhere and we will end up with the average mediocre people running our banks instead.

Should bankers have been awarded their bonuses before the banking crisis? In hindsight perhaps not but we must move forward. We have to reward those who will use their intelligence, knowledge and experience (including lessons learnt) to safely take the banks back to recovery. So before we cry out how unfair it is that bankers should get such high bonuses when we are struggling, we need to also think about the ramifications of not rewarding them.

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Is There Anything Wrong With Tax Avoidance?

Ben Franklin once said:

“Nothing is certain except for death and taxes.”

I would amend that quote to add at the end: ‘….and that people will try to avoid them both’

Before I start this discussion I’m going to leap into a comment:

Tax avoidance may be immoral or at best ethically suspect but it is entirely legal and those who have done it, under the law, have done nothing wrong. Its seems to me therefore absolutely laughable that MP’s can take the moral high ground and shame individuals for carrying out such an act ‘depriving the British public’  of money that could be used for vital services.  Not too long ago a large majority of these MP’s fraudulently took public money for themselves in the form of expenses. That WAS illegal. The phrase ‘those in glass houses’ seams a little too tame somehow.

In some ways the government is blurring the line between tax evasion, which is entirely illegal, and tax avoidance, which is entirely legal. But as the’ benefit scrounger’ cause, which they all leapt on, has lost its edge, tax avoidance is the new moral cause to eliminate. It does seem a bit like a mad scramble to condemn anyone who has more money than the average person, in a desperate effort to connect with the British public in these times of recession.

JImmy Carr – the unfortunate poster boy for tax avoidance

Jimmy Carr therefore became the unfortunate poster boy for tax avoidance. I notice that Mr Cameron didn’t mention Conservative supporter and donor  Sir (pending) Gary of Barlow in his condemnation. ‘Take That became a little like ‘Keep Everything’. Former Lib Dem Treasury spokesman Lord Oakeshott told The Observer: ‘If only Jimmy Carr had given £50 to the Tories, Cameron would have had to pull his condemnation’. It also made me wonder if any current MP’s and Lords are using a similar Jersey-based K2 scheme to pay income tax rates as low as 1%. I’m thinking at least a few of them are living in a ‘glass house’…..or mansion…..with a possible glass moat.

Singling a person out has become a  sorry trend among all the political parties in an effort to carry favour with the public mood. It is a cynical PR  ploy that should be beneath them all, as unless it is an act carried out solely by one person  they should not condemn an individual in public for an act carried out by many. A recent case in point would be Mr Diamond of Barclays Bank, concerning the interest rate rigging scandal.  Many people and many banks were involved in this  but the only name politicians want to attach to it is Mr Diamond, who will now be forever linked to it. Another important point is hasn’t our Prime Minister got more important things to worry about than a comic using the British  tax system in a legal way? If Jimmy Carr avoided a few billion in tax, which we could claim back, then by all means name him to the public and  go get it. But the truth is he hasn’t , unless his Christmas DVD does phenomenally well this year.

Taking a brief look at the statistics, HM Revenue and Customs reveal that in 2010/11, 80% of people with incomes between £500,000 and £10m had an average income tax rate of at least 40%. The actual rate they should be paying is 50% tax of earnings over £150,000. The figures also showed 6% of those earning more than £10m paid less than 10% in tax.

But one point that is being missed here perhaps  is that it’s the rich who pay the majority of income tax already. Indeed one could argue that a wealthy individual pays more than enough tax for himself many times over, so why shouldn’t they avoid some of it? The treasury released figures last year showing the top 1% of earners paid nearly 25% of all income tax and 75% was paid by just 25% of the population.

Jimmy Carr, who satirised “fat cat” bankers  protected £3.3m a year from tax by putting his money through the K2 scheme.  A scheme which is now  under investigation by HMRC. But why wasn’t it before? The government can’t chastise someone in public if a person legally uses the UK’s financial system for their own benefit. The government should have stopped this a long time ago and I suspect they have known that it exists for great number of years.  If the government wants to publicly announce when individuals do something morally ambiguous, they’ll be forever naming themselves on TV.

Any  accountant will tell you, there’s a big difference between tax evasion and tax avoidance. One could put you in prison for seven years, the other is a  perfectly legal use of loopholes by anyone who can afford a financial advisor. I’m sure after Jimmy Carr’s ‘outing’ a lot of other wealthy celebrities and businessmen were frantically calling theirs.

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