The onus of a bonus
- From: alpy <ttrroonniicc@xxxxxxxxxxxxxx>
- Date: Fri, 27 Mar 2009 20:59:27 -0700 (PDT)
http://www.ft.com/cms/s/0/103b273a-1b08-11de-8aa3-0000779fd2ac.html?nclick_check=1
Death threats in the mail. A former executive’s home vandalised.
Protests in the streets. The mood has turned ugly: public revulsion
against the banking industry, blamed by many for provoking the worst
global economic crisis since the 1930s, is reaching a new intensity in
the US, Britain and mainland Europe.
Politicians veer disconcertingly between stoking the anti-banker
hysteria – an easy scapegoat for their own failures – and trying to
calm things down. For the moment, it may be beyond their power to
assuage the anger. Perhaps the fury will abate. But business leaders
and others are voicing concern about the long-term consequences.
“It’s serious. It is spreading beyond the banking sector into
financial services generally and ultimately challenging the market
economy. President [Barack] Obama and Gordon Brown [UK prime minister]
have a real interest in seeking to check the witch hunt and balance
the debate,” says Richard Lambert, director-general of the CBI, the
British employers’ organisation.
In the US, outrage reached boiling point over the past few weeks with
news that AIG, the insurance group being kept alive with $170bn
(£119bn, €128bn) of taxpayers’ funds, had paid out $165m in bonuses.
The realisation that an ailing financial giant on government life-
support was doling out money to highly paid bankers caused a chain of
extraordinary reactions.
Politicians keen to don a populist mantle rushed through punitive
legislation that would slap a 90 per cent tax on bonuses of those
earning more than $250,000 annually at large groups receiving federal
funds. Then, ordinary citizens resorted to extreme measures. Some AIG
employees received death threats. One chilling letter called for AIG’s
staff and their families to be executed “with piano wire around their
necks”. Another, sent to the company, read: “The family members of
your executives are not safe. Your blood will run through the
streets.”
In the UK, the Edinburgh home of Sir Fred Goodwin was attacked, his
windows smashed and his car vandalised, by those angry that the former
chief executive of Royal Bank of Scotland is receiving a £700,000
($1m, €753,000) annual pension after being granted early retirement
aged 50 by the bank, which needed a £20bn government bail-out.
The City of London is braced for anti-capitalist demonstrations next
week when leaders of the Group of 20 industrialised and developing
nations meet in the capital. Police have urged businesses to cancel
unnecessary meetings and suggested that staff wear casual clothing to
avoid becoming targets.
In France, where millions of people protested against excessive
rewards, President Nicolas Sarkozy plans a decree clamping down on
bonuses and stock options for top executives in companies receiving
assistance from the state. Société Générale, the French bank, had to
back down over plans to award stock options to its chief executive and
non-executive chairman.
In Sweden, peformance-related bonuses are to be banned for senior
managers at state-owned companies. Protesters complaining about
rewards for bankers and state pension fund managers sent a bullet to
Anders Borg, finance minister.
But as the west suffers a severe economic slowdown, nowhere is the
disillusion greater than in the US. Citizens’ trust in the American
dream has been shaken. A country that has always celebrated – and
showered with riches – those who make it to the top through hard work
and talent is struggling to understand how so few could accumulate so
much wealth.
Jo Green, director of the Connecticut Working Families party, a
grassroots group that recently made a bus tour of AIG executives’
homes in the state, explains: “The tour exposed the sharp contrast
between the ordinary working-class families who are struggling in the
economic meltdown and the executives at AIG who, despite their role in
deepening the recession, remain largely immune from its consequences.”
Corporate America and Wall Street have responded to the public
vilification with indignation and surprise. “Why do they hate us?”
asks a senior banker. “Have they forgotten that this country’s
prosperity and ability to thrive is built on the success of its
companies?”
The reality is that Americans have indeed forgotten, or chosen to
ignore, the contribution made by the finance industry to the country’s
economic well-being, choosing instead to focus on its role in the most
devastating crisis since the Great Depression.
Financiers with well-tuned political antennae, such as Roger Altman,
the chairman of Evercore Partners, a boutique bank, who was deputy
Treasury secretary under President Bill Clinton, say corporate America
should not be surprised at such reactions. “The level of public
outrage, which is very high, is understandable and ... all of us in
the investment community need to appreciate that,” he told the
Financial Times in a video interview this week. “It’s not a time for
the investment community to be, in effect, mad at the public. That’s
not smart.”
The spotlight being shone on the excesses of the corporate world will
bring with it tougher regulation. After the US government’s move to
curb the bonuses of banks that have received federal aid, more
draconian restrictions could be on their way. The crisis is likely to
change attitudes towards the corporate world for at least a
generation. Opinion polls suggest the public’s trust in business has
plummeted.
Similar concerns are being voiced in Britain. Lord Jones, former trade
minister, says that while some bankers deserve the opprobrium, “at
some point we really have to call time on this. Television pictures
around the world of the mob going to Fred Goodwin’s house and smashing
windows – the damage that does to our reputation is dreadful.” Mr
Lambert of the CBI warns that Britain could lose much-needed foreign
investment in the coming years if executives are seen to be “tarred
and feathered”. He urges G20 leaders to express their faith in open
markets and competitive economies.
Yet it could even be said that the British have been slow to rise to
anger over bankers’ pay. David Freud, a former UBS investment banker
who has just become welfare spokesman for the opposition Conservative
party, recalls telling his deputy at the UK arm of the Swiss bank a
decade ago: “If the rest of the country knew what we were being paid,
there would be tumbrils in the streets and heads carried round on
pikes.”
For a long while the public was tolerant; even now, the anger is
focused on executives at bailed-out banks who continue to receive
large rewards. But behind the fury, Mr Freud sees a fundamental
problem: “I don’t think we understand what is the right rate of return
owed to the banking institution and what is the right pay level for
the bankers.” With hindsight, bankers were receiving money in bonuses
that was needed to capitalise their institutions.
Others urge a sense of proportion. Ian Luder, lord mayor of London,
says: “Blame is not going to take us forward and take us out of this.
We need to move to the next stage, which is reform and
reconstruction.” Sir Martin Jacomb, former chairman of Prudential, the
insurer, worries that the climate will discourage talented people from
taking senior roles in finance. But Eric Leenders, an executive
director of the British Bankers’ Association, plays down the impact on
banking as a profession: “There will always be those who want to be
players in the game.”
Bankers are nonetheless keeping their heads down. Charles Puxley,
associate director at the Chelsea branch of Jackson-Stops & Staff, the
high-end estate agent, says banker clients are reacting to “mounting
pressure and anger” by tending to be “cagey” about how they have
earned their money.
“If you’ve got it, don’t flaunt it,” he says. “The ostentatiousness is
most certainly disappearing.”
One senior American banker based in London, characterising the mood
among his colleagues, says: “People are disappointed and confused
about the public perception of the industry but I don’t think they are
psychologically or physically uncomfortable.” The US, by contrast, has
undergone a “sea-change in attitudes”. He says a former colleague
whose name has emerged in the public uproar is “a little bit concerned
and worried about people directing their anger at him and his family.
We haven’t seen that in the UK.”
Claire McCartney of the UK’s Chartered Institute of Personnel and
Development says banks need to restore the confidence of their
employees, who are fearful for their jobs anyway, by stressing
positive values such as corporate social responsibility programmes.
“The media coverage has been so aggressive towards the banking
industry and has demonised financial services,” she says. “It’s
difficult for people working in that environment.”
Still, students have not lost their enthusiasm for careers in finance.
Cass Business School has seen a 22 per cent increase in applications
for its MSc finance programme this year, according to Stefan
Szymanski, associate dean and a professor of economics.
The current situation is a real-life example of the “compensating
differential theory” dating back to economist Adam Smith, he says,
adding: “If your job makes you public enemy number one, there may be a
price your employer has to pay for that.
“It has never been that difficult to recruit estate agents or tabloid
journalists, has it?” he says. “That’s why we academics are paid such
rubbish salaries, because we’re expected to get our kicks in other
ways.”
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