Here’s my latest column from the Ham & High:
Well, well – we’re about to find out whether we’ve been told the truth or a porky by those super-salaried people who, with the assistance of bonuses, have consistently earned more in a year than most people earn in decades (and in some cases even more: Johnny Cameron of RBS earned £3.3 million in 2007 whilst his colleague Sir Fred Goodwin earned £4.2 million).
I say that because one of the most frequent justifications has been – if you don’t pay these sorts of salaries, you don’t get the very best people – and without the very best, firms will be millions or even billions worse off. Even last year that defence was looking rather hollow in the financial sector – if that’s what having the very best people in charge does, a little bit of mediocrity and a little less self-belief might be rather better! But now, both here and in the US, we’re about to see those claims really put to the test.
With both the Barack Obama salary caps for top financiers and the pressure in Britain to axe bonuses, at least at the very senior levels, we’re about to find out what really happens if those pay packets aren’t quite so astronomical. Those terribly well paid people are getting their bluff called. You told us you had to get that sort of pay to be attracted to those posts and stay in them. So are you going to walk now your pay is trimmed back? We’ve not exactly seen an exodus so far – and I very much doubt we will, beyond those forced out because their bungling was just too much for their banks’ reputation to bear.
Because what’s really driven those pay levels has been a lack of accountability. There has been far too cosy a consensus amongst the banking elite that they talk up the need for each other to be quite so well paid, and with the failure of bank shareholders to intervene, money has been dished out inappropriately.
It is not just the levels of pay that are questionable – and you really do have to question whether a senior banker is really so uniquely talented and vital and important as to be worth decades worth of pay for other jobs – but also the bonus culture, based on short-term profits.
That approach has been wrong for two reasons. First, it has encouraged the slash and burn style where people run big risks, get it right for a while, bail out after having made a nice little pile- and it doesn’t matter to them what they leave behind as they’re no longer there.
Second, there has been far too little attention to the robustness or fragility of the profits run-up. Indeed, giving evidence to Parliament, HBOS’s Lord Stevenson said, “The fundamental mistake of HBOS was the failure to predict the wholesale collapse of the wholesale markets”. He’s wrong. Their failure wasn’t to predict a particular collapse at a particular time. Their failure was to have a business model that was far too vulnerable to the unexpected.
I know from my own business experience that you have to expected the unexpected. You don’t know what the surprises are going to be – perhaps a collapsed ceiling will put your premises out of operation, or a key supplier for the Christmas period will go bust, or a key member of staff will fall seriously ill – but you do know that it’s foolish, foolish, foolish to not be prepared for the unexpected.
Or as the saying from Agathon puts it, “It is probably that the improbable will sometimes happen”. And you don’t have to be paid a financial chief-sized bonus each year to know that.