Bonuses for Bankers - Essay Example

Banker’s Bonuses The purpose of this essay is to provide a critical discussion regarding what actions should be taken in regards to banker’s bonuses. There is little question that this issue has created a firestorm in the media since the economic downturn, typically from people who view banker’s as being greedy and overpaid. This issue gets further complicated in the wake of many failing banks relying on hefty government bailouts that continues to give these massive bonuses to its senior management. In this regard, tax payers could view this behavior as banker’s being rewarded with millions of dollars/pounds for running a failing company which is ultimately subsidized by the average taxpayer. In this respect the paper will provide arguments for three different perspectives. This paper will provide arguments for, against and neutral to the paying of big bonuses to executives and bankers. The first article that this paper will analyze is from Armistead (2010) S- who highlighted that Billy Bragg the musician had refused to pay his income taes unless the Government were to reduce and restrict the bonuses paid out at the Royal Bank Of Scotland (RBS). In this regard the musician stated that he is Q-“No longer prepared to fund the excessive bonuses of RBS investment bankers. Unless he acts to limit [bonuses] to £25,000, I shall be withholding my tax payment on 31st January.” What has complicated the issue is that the bank is primarily owned by the British tax-payers and received massive bailout funding from the Government of Great Britain. It was further postulated P- that this represented a not just a localized trend but reflected an international trend insofar as it is the case that nearly $100 billion U.S. or £62bn is going to be paid out in bonuses this year. Ordinarily this would see to represent a massive problem to the American taxpayer however it is the case that the biggest banks on Wall Street which will be giving out the bonuses are Q- delivering profits of as much as $11bn. Citibank and Bank of America are both likely to deliver profits of at least $6bn, while Morgan Stanley will reveal a much smaller figure of around $1.2bn. One could present that the argument that in Scotland that if it is the case that the RBS is going to have huge losses, needs huge federal subsidies to stay afloat and is owned by the citizens/taxpayers of Great Britain than the paying out of unreasonably high executive bonuses would seem to be unjustified. However in the American context if these major banking firms are settling their repayment criteria and are generating profits above and beyond their expectations (Presumably owing to the leadership of senior management) than one could state that there is no harm in paying bonuses to their management assuming that the mid level investment bankers are also being compensated fairly as well. The next article that will be analyzed is by Corrigan (2009) who suggested that in many respects, bankers on the street are doing everything they can to resist government imposed restraints. On the contrary side of the argument there was the proposition by Vince Cable a Liberal Democrat Treasury spokesman who P- wanted to set up a commission that would have the duty to measure the proposed claims of top earners in investment firms and analyze whether or not their rewards are in fact justified in the wake of them seeming that they offend our very sense of fairness. This is largely owing to the fact that the article highlighted a discrepancy in fairness that Q- “In the past 10 years, remuneration for the average FTSE 100 chief executive jumped by 295 per cent, while average UK earnings increased 50 per cent, according to Manifest, which advises investors on corporate governance. The FTSE 100 index, meanwhile, has fallen 23 per cent.” What this construes is that even though performance of the average banking institution is likely to have fallen twenty three percent there has still been a near tripling of executive salaries in major corporations. While this number may seem high when contrasted against the average earnings of a citizen in the United Kingdom it is the case that their average earnings have only gone up by a half. Implicit in this is a degree of fairness, insofar as most regular people perceive these actions negatively because they would typically feel that they are hard working individuals and that they should be entitled to an equally high increase in payment as well. The next article that will be examined is by Wilson (2010) in which the Chief Executive Officer of RBS defends the proposed £1.3 billion in bonuses. It is the case that S- the RBS executive had indeed turned down his own entitlement to a £1.6 billion bonus but justified the £1.3 billion bonuses which were spread out across approximately 16,800 staff that already had average earnings at approximately £150,000. The article went on to further site that Q- “more than 100 investment bankers received bonus of more than £1m.” S furthermore one of the larger problems as cited in the article was retraining of current employees which could represent a problem insofar as there are likely to be a large outflow of employees who one could assume would rather relocate to investment firms in foreign nations that have less stringent policies in place. Which begs the question, that if these bonuses are not paid in countries like Great Britain and in America, than it is likely that the nations could respectively experience a type of ‘brain drain’ in which qualified investment professionals would emigrate to nations and cities such a Singapore, Hong Kong, or Switzerland where perhaps the bonuses remain and have a more laissez faire approach to financial governance. The final article that will be examined for the purpose of this essay comes from a contrary perspective as the last article. Ahmed (2010) highlighted that George Osborne who is the shadow chancellor urges banks to show restraint when paying out bonuses. Whilst giving a speech at the World Economic Forum in Davos it was the case that Osborne was quoted as saying Q- “that although some "intelligent bankers" understood the need for restraint he was still concerned that the demand for fundamental reform was not getting through.” In this regard one could postulate that this serves as a warning to bankers that if they wish to engage in such behavior as paying out massive bonuses than one could conclude that they may be entitled to do so, however the regulatory climate will likely change in the near future and one could conclude that there would be a massive negative public backlash as a result of this action. P- furthermore it was postulated by Osborne that in the wake of a massive public debt it is unacceptable for banks to pay such large bonuses when the public taxpayer had bailed out the United Kingdom’s banks without a significant loan repayment, which makes the situation more difficult for the government of the United Kingdom insofar as it may make it difficult for the nation to get their hands on credit. In this regard the article proposes that by paying out these bonuses instead of regular dividends to shareholders it comes as a slap in the face of a typical investor and the taxpayers. References Ahmed, K. (Jan 30th 2010) Davos 2010: George Osborne Tells Bankers Not to Pay Large Bonuses. The Telegraph. [online] Available at http://www.telegraph.co.uk/finance/financetopics/davos/7113379/Davos-2010-George-Osborne-tells-bankers-not-to-pay-large-bonuses.html Accessed on March 16th 2010. Armistead, L. (January 18th 2010) Billy Bragg in Protest Against bankers. The Telegraph [online] Available at http://www.telegraph.co.uk/news/newstopics/politics/7012775/Billy-Bragg-in-protest-against-bankers.html Accessed on March 16th 2010. Corrigan, T. (Aug 17th 2009) It’s Not Just Greed That Drives Top Bankers. The Telegraph. [online] Available at http://www.telegraph.co.uk/finance/comment/tracycorrigan/6044732/Its-not-just-greed-that-drives-top-bankers.html Accessed on March 16th 2010. Wilson, H. (Feb 25th 2010) RBS Chief Executive Stephen Hester Defends £1.3bn in Bonuses Despite Loss. The Telegraph. [online] Available at http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7313739/RBS-chief-executive-Stephen-Hester-defends-1.3bn-in-bonuses-despite-loss.html Accessed on March 16th 2010. Read More