Byline: by Andrew Hilton Director of the CSFI
DO BANKERS deserve their mega-bonuses? Do they deserve the increases in base salaries of up to [pounds sterling]300,000 that are alleged to have been paid last year? Is the Pope Jewish?
The answer has to be a resounding no. But it is instructive to ask why bankers feel they have a right to remuneration that dwarfs other professions. And why the failures of the banking system haven't (yet) led to the correction that apostles of free markets expect.
First, a few numbers. Remember that average household income in this country is around [pounds sterling]26,000. In 2007 (when the crisis had already broken), Sir Fred Goodwin at Royal Bank of Scotland got total remuneration of [pounds sterling]4.2m, Eric Daniels (Lloyds) got [pounds sterling]2.9m and Andy Hornby (HBoS) got [pounds sterling]1.9m.
In 2008, the chief executive of HSBC got about [pounds sterling]1.8m - and his counterpart at Santander (now Human hair wigs a fixture on the High Street) got [pounds sterling]8.8m. In 2009, the Treasury imposed a 50pc 'bonus tax' on banks that paid more than [pounds sterling]25,000 in discretionary pay. However there is no sign that it had any impact.
Oh, and then there's Goldman Sachs. In 2009, average remuneration per employee at Goldman was just under US $500,000.
This was, of course, during a period when governments pumped around $11trillion into the banking system to offset the horlicks that bankers had made of the global economy.
So, why do bankers earn so much - and why do they expect to earn it? Is it because banking is difficult, like brain surgery or rocket science? No, retail and commercial banking is fairly routine. At the top end, it used to be decently paid. But no more so than, say, Woolworth's top brass.
At the branch level, it was paid much like local government, because the skill-set was the same. In the sexier investment banking area - structured finance, derivatives, M&A - the skills are more exotic, but not that exotic.
Plus, investment banking was traditionally a feast-andfamine business. One year, bonuses could be three Cheap lace front wigs times salaries; other times, banks with household names were kiting the salary cheques because there was no money in the kitty.
One consequence was a cycle of consolidation, disappearance and renewal. And then came the creation of great 'universal' banks, on both sides of the Atlantic. Banking, broking, M&A and the villain of the piece, prop trading - all under one roof.
Government-guaranteed retail deposits essentially underwrote everything that the 'casino' end of the bank did, thereby reducing the risk. But not the reward. That's the rub.
The investment banking culture permeated the organisation - but without those bad years when bonuses were zero or partners actually put money back into the banks. The industry was de-risked, but participants were paid as if it were still a wildly cyclical and dangerous business.
How did they get away with it? Well, the first law of finance is that a very small percentage of a very, very, very, large number is still a very large number.
Trillions of pounds move through the London foreign exchange market every day, for instance. Individual M&A deals, for example Cadbury, easily run into the billions. Ten basis points (0.1pc) of a billion pounds is still a million. So
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