Do You Think Huge Bonuses Paid to City Bankers Are A Good Thing?

Does it make any kind of sense to have a few people who produce nothing getting paid huge amounts of money for shuffling around electrons and pieces of paper. These guys (and girls) are being paid for being successful at gambling with the bank’s money. Of course, in truth, that money is OUR money. The money of depositors, borrowers and shareholders.

Is there any way to justify these payments?

Do those payments have any positive effects upon the people of the UK or, more likely, do they have any negative effects?

As I write these words I understand that people of the UK, perhaps even readers of these words are among those who are earning these fantastic amounts of money. On an individual level I can happily say ‘well done!’ and ‘lucky you!’ but on a wider level I am less sanguine about the issue!

To give some focus here’s some facts and figures to think about:

In 2014 there were around 3000 City bankers who earned more than €1,000,000 with one lucky, very lucky, person earning almost €25m.

The City had, at the time, more than 3 times as many people earning over €1,000,000 as there were in every other country in the EU added together. A large part of that huge wage bill was in the form of bonus payments.

In 2016 the four largest banks in the United Kingdom paid out almost €6.4bn.

Banking and insurance staff were paid €17.6Bn in bonuses in 2016.

Given that nowhere in the rest of the EU do bankers expect the same levels of remuneration as they get in the United Kingdom it is clear suggestions that bankers need to be paid these figures to attract talent do not stand up. The disparity between the UK and the rest of the EU show that even if payments dropped very significantly London would still be a hugely attractive place to work for bankers across Europe.

Not All Money Is Good Money!

Of course, these high earners spend their money and so we might imagine that this is a benefit for the local economy but this is very much a double-edged sword, here’s why:

Bonuses are paid for performance. Given that much of the profitability of banking rests on ability to gamble on future events (Forex movements, stock prices) with investors’ and savers’ money there is a significant danger that staff will take unnecessary risks in order to maximise their paper performance and to enhance their bonuses. If those bets go wrong there are terrible consequences for the banks including failure of the bank through bankruptcy with job losses, lost savings and pensions.

If a bank runs into difficulties due to its staff taking risks with the bank’s funds then it is we, the taxpayers of the UK, who end up bailing the banks out as we did in 2008, notably with the nationalisation of the Northern Rock building society, Lloyds TSB and Royal Bank of Scotland. Before the crash of 2008 these businesses had been paying out huge sums to staff who failed hugely in their endeavours and were bailed out by British taxpayers.

When one small group of people earn disproportionately high wages they can fuel a ring of price increases that affect less well paid members of society. Some may remember the days of Harry Enfield’s ‘Loadsamoney’ character. Loadsamoney was a plasterer who earned huge amounts of money for his work. His income was fuelled by the easy spending city folks who could afford to splash around money. Problem was that the ability to charge high prices on the back of wealthy city types meant that ‘ordinary’ people could not afford to hire these newly expensive traders. Again, good luck to those lucky ‘loadsamoney’ people, but when the bubble bursts, as it tends to do, those tradesmen and businesses will not have their typical client base to fall back upon.

Every pound paid to a single, overpaid employee is a pound that cannot be paid to their less well paid colleagues. Remember that most banking and insurance staff see nothing of these bloated bonus payments. For example, a bank branch manager earns on average just over £30,000. Each banker earning £1,000,000 in bonuses is earning as much, in bonus alone, as 33 bank managers! That same bonus is enough to pay for almost 70 of the staff behind the counter in your local bank. These days most banks do not have enough staff to serve their customers adequately and we all spend ages in queues when we need to use our high-street banks. The bloke driving by in his bonus paid Bentley is responsible for your long wait to do your banking business!

How Bonus Payments Led to the 2008 Crisis

The 2008 crisis that affected many of us living and working in UK was considered by most experts to be a result of excessive bonus payments. The effects of that catastrophe with the worldwide recession that followed still affects many of us today!

Greed and excessive risk was rewarded by banking and insurance employers who themselves benefited from the risky actions of their highly-paid staff.

We do not think that a fair society is one where a tiny minority of employees earn, in some cases, hundreds of times as much as their less well paid colleagues in the same business. We think that a fairer division of earnings is better for most businesses for this reason: Imagine a shop that sells good quality furniture. They might estimate that their average client needs to earn £60,000 before they can afford the sofas they sell. Each person getting paid a million-pound bonus needs only one, possibly two, maybe three sofas in their home. After all, we each only have one bottom available to sit on a sofa. How much better would that furniture retailer’s business be if the number of people earning £60,000 were to double or triple as a result of greater equality in earnings?

In fact, most businesses would be better off if earnings were more equal. The same amounts of money would be paid out by employers to their staff but most of us would be better off, have more money to spend in Oxfordshire businesses; in turn those businesses would be better able to pay higher wages to their own staff in a virtuous cycle!