KEY POINTS:
Big bonus payments are a fact of life for many executives and senior managers at major international banks. Such individuals receive most of their remuneration in bonuses, whereas for most other industries, bonuses are paid as an add-on to salary or wages, and form a small part of the overall remuneration package. The practice in the banking industry has resulted in some huge bonus pay-outs in recent years, particularly in the US and Europe.
This culture has provoked a storm of criticism in recent times. Rightly or wrongly, many people see the banks as largely responsible for the current recession, and so stories of seven figure bonus payments tend to attract media attention, and moralistic comments from politicians.
There is now a move to roll back the bonus culture, with politicians playing a key part. This New Zealand Herald article refers to an announcement by British Prime Minister Gordon Brown recently that board members of banks bailed out by the taxpayer would not receive bonuses this year. US President Barack Obama is also in on the act, setting a cap of US$500,000 on pay at banks rescued by his Administration.
Even the bankers themselves seem to acknowledge there is a problem: Andy Hornby, former CEO of HBOS, previously the UK's biggest mortgage lender and now part of Lloyds, has said that there "is no doubt that the bonus system in many banks around the world has proven to be wrong in the last 24 months." To pay staff cash bonuses for their decisions "without it being clear whether these decisions over the next three to five years have proven to be correct, that is not rewarding the right type of behaviour".
Part of the problem seems to be that significant numbers of bankers have actually made profits for their employers, albeit that the huge losses those banks have suffered in other, often small parts of the operation, have outweighed the gains. But where an individual employee is rewarded on the basis of their individual contribution, rather than the overall profit or even long term health of the organisation, those losses are irrelevant. Hence the Herald article refers to the French Banking Federation unveiling new guidelines which include a recommendation that payments be based on a bank's overall costs, including adequate capital ratios and risk coverage, rather than the trader's specific profit for the bank. The goal is to link the trader's incentives to the bank's long-term interest.
The problem is the bonuses for 2008 and 2009, the criteria for which have in most cases already been set and cannot be un-wound. And as this article in The Times points out, even where there are no criteria at all, and a bonus is stated to be discretionary, it is risky for an employer to ignore completely an individual's excellent performance, and simply say that because of the general environment, nothing is going to be paid out. Where the employee gets most of their remuneration from the bonus, that approach is asking for trouble, particularly if handsome bonuses have always been paid in the past for good performance.
Banks also have to attract top talent, and if their bonus schemes are significantly watered down, requiring them to decline payments even for stellar individual performance, this is likely to impact on their long term future as much as or more than paying large bonuses.
All this suggests that it is not a simple matter for banks just to stop paying bonuses, or for governments to insist that bonuses are not paid if banks are rescued.
Greg Cain
Greg Cain is an employment lawyer at Minter Ellison Rudd Watts.
PHOTO/AP
