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It’s time to do away with bonuses

2012 February 3
by Paul Vallely

What is it that really outraged the public over the pay package of the RBS boss Stephen Hester? It doesn’t seem to be the fact that that he was due to be paid over £2m a year so much as that almost £1m came in the form of a bonus. If they’d given him the £2m in salary they would probably have got away with it. It’s the fact that it’s a bonus that has stirred the pot.

Bonus in its original Latin mean plain ‘good’ but it has taken on overtones of something extra and optional. You are paid for doing your job but you have to do something more to get a bonus. Yet the world is replete with exceptions.

The footballer Michael Owen was unusually hired by Manchester United in 2009 not on a salary but on a “pay-per-game played” basis, with a bonus for every goal he scored. Bonuses are woven into football finances with players getting appearance bonuses, loyalty bonuses, and bonuses for reaching various stages in Cup competitions. Some of these involve extra achievements, others are mere elements in the wage structure.

In restaurants the bonus, in the form of the tip, has become institutionalised as the service charge. It is unclear now whether the money goes to the waiters, is split with the kitchen staff, or just trousered by the management. Something similar has happened in banks, though in an even more corrupted form because bankers and traders are rewarded for taking risks not with their own money but with other people’s.

Bankers kept raising the stakes in the global capital casino because it was a one-way bet: they won, or we lost. They got rewarded for dealing in what turned out to be sub-prime mortgages – and the rest of us paid for their short-term bonuses with our long-term austerity. The FT this week reported that at least half the rise in bankers’ pay in recent years came from skimming off fees, not financial innovation. The moral of the Hester hoo-haa is that the public has still not forgiven bankers for the damage they inflicted on the rest of us.

Economists despair of this. A strategy for growth, in RBS and the national economy alike, should be the top priority, above any strategy of pay. If we don’t pay top dollar to whizzo bankers they will defect to their rivals. Bonuses are not ideal, but if we are to keep Mr Hester in post they are the lesser of evils. So they argue.

But sometimes politics are more important than economics. Mr Hester may have met his board’s targets in shrinking the state-owned bank’s bloated balance sheet. But the bank’s share price has fallen by over 40 per cent during the last year. A bonus smacks of rewarding failure.

The more fundamental question is who deserves a bonus? London train drivers are to get one just for turning up for work during the Olympics. Bosses don’t want people phoning in sick during the added chaos. But paying people just for doing their job feels like caving in to an implicit form of blackmail.

On the football field is it fair that the man who makes a wonder-pass to the feet of Michael Owen just before he scores doesn’t get a bonus too? In a team game shouldn’t the whole team shared the bonus?  Why should some jobs be excluded from the bonus culture? But what criteria might be used to gauge whether, for example, a reception teacher in a primary school, should get one? Whatever yardstick were selected would probably impoverished the richness of the teaching by overemphasising one target.

The problem with bonuses is that they distort the market and institutionalise unfairness. They may bring short-term gains but they cause long-term problems. Our economic culture would be better off without them entirely. Instead of the bonus we should be focusing on another borrowing from Latin – the summum bonum which we might now translate as the common good.

Church Times

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