With FTSE 100 companies still dishing out handsome rewards to their bosses, the city's bonus culture is in desperate need of an overhaul.
Bonuses paid to top executives regularly made the headlines earlier this year, with much disgust being expressed over the large wads handed out to the likes of "Fred the Shred" and his fellow bosses, who presided over the near-collapse of the UK's banking system.
With the UK being firmly in the grip of recession, and Fred's old company, Royal Bank of Scotland (LSE: RBS) being effectively nationalised (with 70% being owned by UK taxpayers), it might come as a surprise to some to learn that RBS's new retail banking boss, Brian Hartzer, has been handed a bonus package worth £2.3m, £1m of which is in the form of shares. And what does he have to do to get that bonus? He has no performance targets to meet, and all he has to do is just stay in the job for two years (though there is an additional, performance-related, £1.3m worth of shares up for grabs on top of that).
No strings attached
While it is clearly necessary to attract and keep the best people in the top jobs, and that requires paying top-drawer remuneration, many people, including customers, employees, and shareholders, might feel quite aggrieved by the short-term, no-strings-attached, nature of Hartzer's basic bonus package.
It might also come as a surprise to learn that, as reported by the Independent, the top bosses of Britain's biggest companies are still looking to trouser bonuses of around 90% of their basic pay, at the same time that profits have fallen and dividends paid to investors have been slashed. Bonuses do appear to be falling from last year's levels, but the directors of a full 40% of FTSE 100 companies have received pay rises, at a time when redundancies are reaching all-time highs.
Monkeys can't do it
But before we become too judgmental, there is perhaps one fallacy that needs to be cleared up. If you listen wherever people gather to discuss such things, be it in pubs, on blogs, or, dare I suggest it, on discussion boards, you'll come across a common theme -- running a big company is a cushy number, and most of the participants firmly believe they could do it as well as anyone. Sadly, that is simply not true. Managing a large company well at the highest levels is a tough job, and there really aren't many people of the right caliber to do it.
Warren Buffett once famously remarked that we should look to invest in companies that are so easy to manage that a monkey could do it, on the grounds that one day that could be what we get. But such monkey businesses are very thin on the ground, and Buffett himself has a track record of investing in companies that are notable for their great management.
I also think it's a mistake to insist that bonuses should only ever be paid when a company is making a big profit, because that reinforces what I think is the biggest fault with the whole bonus business -- short-termism.
When an economy is booming, and a business sector is making money hand over fist, it's much easier for idiots to be successful, and we certainly saw a sizeable helping of idiocy at the top levels of banking management over the past few years. No, it's often when companies are struggling, when costs need to be cut, debts need to be managed, and redundancies need to be made, that the best managers really earn their money -- minimising losses during lean years is every bit as important as maximising profits during times of plenty.
Short-termism is the killer
So what do we need? We need an end to short-term bonus schemes, which only inspire a "pump and dump" mentality, motivating our bosses to fill their troughs while the going is good and then clear off quickly as soon as the fan starts getting a bit soiled.
When I invest in a company, I want to see managers at the helm who look like they're there for the long run, and who have every reason to want to be there 10, 15 or even 20 years in the future. And to that end, I'd much rather see bonus schemes that reward good long-term management, which don't rise and fall with the fads of market sentiment, and which take decades to fully vest. I don't want to invest in companies whose managers are on bonus deals that mature quicker than they can wear out a pair of socks.
The banking sector probably needs such a cultural change the most, but it's unlikely to happen any time soon, as everyone involved still seems to be operating in "knee-jerk" mode. With several of our big banks being mostly in public hands, we may well have a golden opportunity now to change this short-term culture, through the agency of the shareholders' representative, the government. But it's an opportunity that's very likely to go begging.
Got any thoughts on the UK's current bonus culture? Do share them with us below.
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