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Barclays bonuses keep the pot bubbling

Finance Blogger: Anthony Harrington Anthony Harrington

It will be a long time before bankers are forgiven for the excesses that triggered the credit crunch and the global recession so, inevitably, each time the media gets a chance to loudly go on about bankers’ bonuses, they do. The furor over Barclays Bank’s announcement of its bonus strategy almost eclipsed the fact that the bank’s record results were absolutely outstanding.

I had a lengthy interview several months ago with Anders Bouvin, general manager for Handelsbanken’s northern UK operation (he is just about to be appointed head of UK operations). In general terms, the bank does not pay bonuses, he pointed out. You are expected to do your job to the best of your ability and doing well just means that you have done your job to the required standard. (For an excellent account of Handelsbanken’s approach to pay see this article where Handelsbanken chief executive Pär Boman waxes lyrical on the benefits of fixed pay.)

That is all well and good, but where a bank has a proprietary trading desk or a fixed income arm, it has to motivate a crew of hot shot traders who are making multiple trades on behalf of the bank every day of the year for very significant sums of money. About the only structure that works in this case is a bonus (since those people are highly valuable and can just as readily trade for themselves or for another employer).

Profits at Barclays Capital were 89% up on 2008, at £2.46 billion. That is a massive contribution to Barclays’s overall pre-tax profit of £5.6 billion (£1.6 billion in 2008), and demonstrates how important trading is to the bank.

Then there is the fact that a trader who really understands his/her specialist area and has a track record of generating significant returns is gold dust to any trading desk. If they get restless, they can either find an alternative berth in another organization or simply go into business trading for themselves.

True, their position in the bank gives them a huge advantage in terms of the information flows and resources at their fingertips, but if they really know their stuff they can make many times their salary on their own if they can find a sufficient stake to get themselves going. Is a bank really supposed to turn around to such people and say, “Hey, it would be politically sensible for you to take a large pay cut this year, but please keep up the good work…”

There are other areas of the bank that are more mainstream banking, but even here there is a need to reward excellence in order to retain key staff. A manager who consistently makes the right calls in difficult corporate lending decisions and who builds up a large loan book with near zero defaults is earning his/her bank serious profits and is highly attractive to any number of rival organizations in half a dozen countries.

If you are running that bank, you do not want such people feeling irked and restless and primed to take calls from headhunters because you’ve decided it is politically expedient to cut their pay to quiet down the media hunting packs. Note too that bonuses, which sound optional or gratuitous, particularly in TV soundbites, are very much part of performance-related pay. Management theory is unanimous in preferring performance-related pay to flat-rate pay which is blind to performance. What went wrong with the crash, as has been pointed out in gallons of print ink, is that bonuses became disconnected from the long-term growth interests of the organizations concerned and instead were rewarding highly destructive short-term behavior. That is a massive indictment of senior management strategic thinking, rather than a point that proves that bonuses are a worthless tool. You get the behaviors you reward, that’s the point of performance-related pay…

Further reading for banker’s bonuses

Tags: banking , Barclays Bank , bonuses , Handelsbanken , performance-related pay , politics , trading
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