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Editor’s letter: Pro bonus – large pay awards and the issue of morality

No fewer than 61% of you said “Oh God, here we go again”
when we asked on our website what you made of the banks’ recent results and
bonus announcements (see our FD Question). Cool heads are needed on this one.

In an article he wrote in the Financial Times on the day the FSA
released its new pay code for the 26 biggest banks, chief executive Hector Sants
said the issue of pay was “often conflated” with the question whether large pay
awards are inherently immoral.

He correctly sidestepped the issue, pointing out that if politicians believe
it is a problem, then they can deal with it through taxation, for example (and
we know that thought has often crossed Alistair Darling’s mind). You could argue
that it is actually immoral for banks to not share their wealth with the people
who created it, though I suspect Karl Marx might choke on this as a form of

But, of course, as far as some of these banks are concerned, we own them ­
and for most of the rest, we as taxpayers are underwriting their capital. Sants
makes the point that the government therefore has a role to play as a
shareholder. However, the government must remember that its role as shareholder
is probably at odds with its role as political beast: as owners, the government
should be satisfied that the scale of incentives and the formula for calculating
them are compatible with sustainable, profitable growth. That’s a completely
different thing than ‘the politics of revenge’ to which politicians on both
sides of the House are prone.

So what’s going on, you’re probably asking. Am I suddenly enamoured with
bankers, having given them a good bashing on this page several times in recent
months? No ­ but I am trying to recognise the difficulties of regulating pay
(and I mean regulating it, not limiting it).

It’s a complicated, messy business. Look, for example, at the recent case of
JP Morgan and Barclays Capital. BarCap poached a team of traders from JP Morgan,
and JP Morgan asked the FSA to have a good look at the BarCap pay deal that was
offered to lure away the stars. Questions included, how is BarCap going to
compensate these guys for bonuses they will no longer be entitled to from JP
Morgan? Is BarCap guaranteeing bonus payouts? And for how long (the bank
recently admitted it had offered some recruits two-year guarantees, which the
FSA now regards as verboten)? And if not, how can any compensatory bonuses be
tied to the ongoing performance of deals at the team’s previous employer? The
whole approach to ensuring that bonuses are geared to actual performance falls
apart if there’s no way of knowing whether these bonuses would have been earned
or not.

The FSA came in for a bit of stick when it said that it would look again at
the issue of bankers’ pay in about a year’s time. It may, warned the
Financial Times, have to backtrack. “It’s fine to be at the forefront
for 12 months, but if there is no international momentum beyond that, it isn’t
competitive to be out on your own,” said Sants.

So we’re back to the problem of trying to get international accord on this,
to prevent bankers bouncing around the globe and setting up their dealing desks
in whichever jurisdiction allows them to make the most money. The will to do
just that is probably there, through the G20 and even, I should think, via the
Basel capital adequacy regime. Imagine the conversation: “Your bonus just cost
us an extra two $2bn in tier-one capital…” The FSA’s code makes for a good

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