Bonuses for bankers

THE ARGUMENTS FOR:

Remuneration in the City has always been linked to individual excellence. Now, more than ever, banks want to keep their best staff, in order to maximise earnings and rebuild battered balance sheets. The staff they want to retain are those who are best-suited to the reconstruction, using their expert knowledge.

Bonuses are an important mechanism to retain executives who 'know where the bodies are buried'. These individuals are vital for identifying how to move a firm forward after it has suffered problems, or in some cases for keeping information out of the public domain.

Often the term 'bonus' really refers to the 'commission' that a broker (salesman) has earned bringing business to the firm. If he has fulfilled his part of the bargain and brought in revenues as agreed, why should he be penalised just because traders in another part of the group have lost a packet on sub-prime mortages?

The promise of a share of profits is really the only effective way of providing an incentive for workers to go the extra mile when money is tight and salaries capped. Troubled Swiss bank UBS is currently offering brokers sky-high bonuses of up to three times their annual profits just to join the firm, so desperate are they for good staff.

Paying staff a capped annual salary and an end-of-year bonus is the most sensible method of remuneration in a downturn. It gives firms much improved cash-flow during the course of the year, since bonus payments only need to be made after profits have already been booked at the year-end.

THE ARGUMENTS AGAINST:

The relationship between profits and bonuses appears to have broken down. The Royal Bank of Scotland's current plan to pay £1bn in bonuses is an insult to taxpayers who have just bailed out the bank to the tune of £20bn.

While the bonus system can work for private companies or those with shareholders keen to maximise profits, it works less well in largely government-owned, loss-making banks, with taxpayers questioning the fairness of the pay-outs at every stage. The financial industry is unused to this kind of close scrutiny, as are its well-remunerated top executives.

Bonuses encourage risk-taking by traders intent on making as much profit as they can in the short-term, without regard to the negative long-term effects their actions might have. The sub-prime disaster shows just how damaging this can be to the entire financial system.

Some financial instruments became extremely lucrative in the boom period and the bonuses paid out disproportionately large, causing jealousy both inside and outside companies and giving firms a poor public profile.

Discretionary bonuses have become contractually binding in recent years, meaning that even if companies' profits are falling, they are still legally compelled to pay them. Despite the current public outcry, in many cases there is nothing firms can do to stop giving guaranteed pay-outs.