It is bonus season in the banking sector, with billions expected to be paid – including to banks bailed out by UK taxpayers. This week Barclays boss Bob Diamond sought to justify them at the Treasury select committee. Mark Littlewood, libertarian head of the Institute of Economic Affairs thinktank, believes Diamond and his ilk are entitled to their colossal remuneration. Labour MP Diane Abbott, whose Hackney constituency borders the City of London, thinks the opposite. Susanna Rustin sits in on an the argument.
Mark Littlewood: I am extremely relaxed about high-end pay for bankers and I am concerned that politicians are demonising this profession. And I favour people being paid a substantial part of their income as a bonus, whether that’s a £10m salary and £10m bonus, or a £20,000 salary and a £20,000 bonus.
Diane Abbott: If Mark’s not concerned about the bonus culture in banking, he clearly doesn’t know much about the financial services industry and what were the underlying causes of the credit crunch. One was poor regulation – and as a politician I put my hand up. Another was the emergence of an international casino that was trading in what they now call toxic assets, but which were financial instruments that represented debt. The third reason was these huge, year-on-year cash bonuses that incentivised bankers not to look at the long-term sustainability of their banks or even the British economy, but at the short-term earnings of their bank. And the taxpayer had to bail them out.
ML: So Bob Diamond is fine because Barclays wasn’t bailed out by taxpayers?
DA: No, because Barclays is only able to make such high profits because of the billions that the taxpayer, the Bank of England, poured into the system – so-called quantitative easing. My argument is that the bonus culture incentivises the practices that almost crashed the international economy.
ML: It was a minor reason . . .
DA: It was certainly a factor. I wouldn’t say I was against all bonuses, and I accept that if you’re going to do something about bonuses you have to do it internationally. But if you are going to give bonuses they should be in the form of stock options that you can cash out when you leave your company.
ML: It’s not that the remuneration is colossal that troubles you? You’d be unworried if a bank CEO was on £20m? You’re worried that he’s on £10m and then being risky to get the other £10m?
DA: That is one of my concerns, but my other is the scale of it. We live in an increasingly unequal society and I don’t think that makes for a better society. The culture you’re defending is one that says the only thing that matters is money, that says it’s not about taking pride in your job, or in your bank, not about taking pride in your country. It’s all about money, and I say to you that that materialistic culture seeps out on to the streets of my constituency in Hackney, and so you have young people who believe it’s all about bling.
ML: It seems to me there are two concerns you’ve got; one is the bonus culture per se, and you would hold that view even if the chief executive of Barclays was on £50,000 a year and a £50,000 bonus – because he’d still be gambling to get half his salary.
DA: No, no, no, it’s the absolute scale of the bonuses!
ML: But those incentives would be the same, depending on what proportion of your salary the bonus was.
DA: No! The fact that we’re talking about millions of pounds makes all the difference.
ML: The people at the high end of banking are brilliantly skilled. It’s ludicrous to believe they’re all cretins. The problem is the unique nature of banking. Woolworths can go to the wall easily, it’s sad but it does not bring about the collapse of world capitalism. It’s trickier with banking. How do you collapse a bank in an orderly fashion? That’s the bit the regulators have got horrifically wrong. It is not possible for a bank to go to the wall in good order.
DA: It used to be.
ML: I want to see more of it, I want bank failure all the time, I want that to be a normal part of the process – companies go bust, others come in and take over the assets. Just in the same way that department stores have changed radically, so should banks.
DA: I’m not saying bankers are stupid, they know precisely what they are doing, but what they are doing is driving up their own salaries and bonus levels at the expense of their organisations.
ML: My question to you is, once you’ve got whatever you consider to be your ideal regulatory system, who do you think should set the salary and bonus structure for the CEO of Barclays?
DA: Shareholders and management, but they have to do it within the right regulatory structure, and the right structure for me is one that, through negotiation with other financial centres, either eliminates these mega-bonuses, or translates them into a bonus where you have a long-term interest.
ML: If in that case Diamond is the chief executive of Barclays investment bank, and they decide in their wisdom to pay him £15m a year and give him a £10m bonus because their profits are up in 2010, you are perfectly relaxed about that? You believe that’s a decision for the shareholders to make at their AGM?
DA: I wouldn’t be relaxed about a £10m bonus.
ML: So is the problem that Diamond as a putative gambling banker is earning £20m a year, or is the point that no one should be earning £20m a year? Wayne Rooney or Cheryl Cole or Simon Cowell or Stuart Rose who used to run Marks & Spencer – is it OK for him to become colossally rich?
DA: You’ve bought the bankers’ argument: the reason we get all these huge bonuses is because we’re so brilliant! The man or woman in the street might argue, if they’re so brilliant, why did they nearly crash the world economy? It’s almost like a stickup on the taxpayer: if you don’t give us all this money we’re going to go – to New York, to Geneva. The voting public in the US and Europe would like to see governments bear down on bonuses, and what governments are doing is hiding behind one another.
ML: But I think having an incentive element in your work is a good thing. It can be devilishly difficult to measure in some roles; it’s quite difficult in my role running a thinktank, exactly what are the success criteria I’ve got to hit? But basically, I like the concept and I think it encourages people to give their all, to improve their performance.
DA: It’s a toxic concept in banking because there’s a big question mark about if these people’s performance is any good – let’s not forget they nearly crashed the world economy, and not because they’re stupid. The problem with the bonus culture and performance-related pay is that it encourages you to think about your pocket.
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