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Bonus Envy
February 2009

An old wisecrack states that bankers are different from you and me: they are better-paid. But are bankers also different, in the way they earn their money, from film stars, pop musicians and footballers?

Until last year, people at the top of the banking industry were in the same position as their counterparts in popular entertainment and professional sport. Their pay was not subject to official regulation of any kind. If you were a star in finance and your activities brought in revenues of millions of pounds, you could negotiate with your employers an income which reflected your productivity. In some types of banking - notably securities trading (where an individual might make millions by selling securities for higher prices than were paid for them) and corporate finance (where one senior executive with a long client list could bring in fees of several millions) - the link between income and output was clear, and might even be stated in a contract.

But in 2008 the free market in bankers' payment practices came to an end. Various misdeeds by bank executives were revealed in the subprime crisis and an international campaign emerged to restrict their annual bonuses, which in the City of London had sometimes exceeded £10m. On 21 May, the main story on the front page of the Financial Times, which had led the campaign in the UK, carried a story on "Watchdog to focus on bank bonuses".

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February 10th, 2009
9:02 AM
The bonuses were paid out of the short term increase in Capital value. In the long term the value collapsed. Bonuses attached to short term performance will skew the market to favour behaviour that creates value in the short term over behaviour that obtains a smaller short term return in favour or a larger longer term one. The banker with the bonus doesn't care if the long term bubble collapses - he won't be there. I'm not averse to large bonuses but there must be a control that a. Prevents bonuses being paid out of a speculative bubble. b. Rewards genuine performance that benefits the ultimate customer. As an example of (b) I note that investment banks take the same fee regardless of whether shares go up or down. Now I understand that the banks have to have some fee to survive in a down time but the incentives should reward the desirable behaviour.

February 6th, 2009
2:02 PM
Opera singers did not cause economic collapse. Greed and stupidity from bankers did.

February 4th, 2009
11:02 PM
The answer to this question is simply that the payment to a banker will encourage the taking of risks and associated social ills. No such side effect occurs when the same sums are paid to footballers/movie personalities.

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