Finance Bonus Culture

Today there's a lot of news coverage about Mr Hester who has been awarded close to £1M for his work in restructuring the Royal Bank of Scotland (which is majority publicly owned). The worry, apparently, is that if he were not awarded a bonus then the Government could see a lot of the board walk. This is disingeneous. Mr Hester's remit was to restructure the bank. He is doing his job. Getting a bonus for that is a little strange. There can be an argument that Mr Hester has managed to make some changes that have instilled a little more confidence in the Bank and that without his magic we would be in trouble. Again, this is partially true and even in this case it is extremely difficult to attribute the Mr Hester himself. There is a grave injustice being carried out here. Mr Hester unfortunately for him is the lightening rod as other financiers are also guilty of personal greed. 

If Mr Hester were truly interested in restructuring the bank perhaps he himself would be interested in setting an example and forego the bonus and publicly state he is doing his job and financiers should simply be paid a decent salary for doing their job.

Financial Rewards - the wrong approach?

Today Mr Cameron (the UK prime minister) has said he supports shareholders ability to veto the executive pay packages. However, there already exist rules on executive pay packages which are along the lines of pay awards given in the case of better than expected performance that is in line with the company's mission. This could really be a lost opportunity. The crux of the problem is financial institutions awarding employees that deliver short-term gains. This is wrong and has resulted us in being in the state we are in. It would be better to look at ensuring financial institutions look to longer-term investments that ensure growth rather than short-term investments that possibly result in short-term wealth, but long-term poverty. Pension funds, which are the largest and most powerful source of funds for financial institutions should be restricted only to longer-term investments and the fund managers should be given bonuses over the longer-term and not based on short term profits. I think that this would help to head-off a potential future crisis. In addition, similar measures for the investment arm of high-street banks would be wise. The goal would be to reduce the amount of money used for speculation and increase the funds for long-term investment and growth. It would be wise to look at things from that perspective, but I am not sure if anyone is listening.

Financial Crisis - addressing the root cause

The main issue with the current financial crisis is short-termism. A majority of financial institutions are interested in the next quarter or next year at the furthest. Which necessitates opportunism at the cost of sustainability. One measure that will go to help address the financial crisis is to look at the issue of bank bonuses. The metric for a bonus should be was this a wise investment which also means was this an ethical investment. The only way to understand if an investment was a good one is with hind-sight which means that the bonuses should be retrospective not over the past year, but over the past 2 years at the minimum. At this point one can determine the value of the investment. Such a measure would turn the financiers focus from short-termism into investment (which is where they should be). It is up to the investors that provide the funds to the financial institutions to demand this. That means it's up to us to demand our pension funds, banks etc make ethical, sustainable investments and not short-term gains (that may result in a quarter hike in our returns) that in the long run prove to be catastrophic. There are some that are thinking this way.