On bonuses, RBS, and how to improve going forward

So the UK government decided to scrap the bonuses at RBS (FT.com).

UK gov, or its tax payers, owns 68% of the bank, so they say they are going to honour the contractual bonuses and scrap those directed to anyone related to the credit debacle (and slap wrist to the executive directors, they’ve been naughty, naughty, naughty… non-execs were nowhere to be found for comment, reprimand or else, probably busy un-overseeing a different company).

But, after all, what are bonuses about? I don’t get them. Let’s forget, for a moment, bankers’ bonuses. Let’s focus on bonuses. Why does anyone need one? I guess it serves well to the employer, having a variable part of the salary subject to a dubious repertoire of performance-related facts.

I can understand using such schemes to make employee costs more flexible and related to sales, turnover or whatever, that would explain limited bonuses (say, 5-10% of salary).

For the hefty bonuses paid to investment bankers (excuse my spelling mistakes), I don’t really get it. What was the need to pay low salaries and bonuses 10, 20, or 100 times annual salaries? To retain valuable staff, top bankers and the bonus defence team say. And that’s the same excuse No 10 is giving now for the £175m that will be paid in bonuses.

In their new role as financial maverick, Whitehall, sorry, RBS is also proposing cashless bonuses for the future:

Deferred awards: Staff who are essential to the bank’s recovery and who might otherwise be at serious risk of leaving, and who remain with the Bank will receive a deferred award for 2008. The deferred award will be released in three equal annual instalments beginning June 2010 and payable in sub-ordinated debt of RBS i.e. not in cash. (click here for the full statement)

What I don’t yet get is the need of bonuses in uberflexible job markets like the UK or US’s, what’s the point? Pay them a fixed fortune yearly salary. Obviously the new salary will be much better than the current basic one and much lower than current salary+humongous bonus, so that shareholders get the lion’s share of profits, as it should be, since they are the ones running the risk, not share them 50/50 with the employees until now. Only in the banking industry…

If the going gets tough and you cannot pay them the generous salary that you promised, made them redundant. Full stop. Because you can. Full stop. Because you can’t afford them at that salary range. Full stop. He who lives by the sword, shall die by the sword. Full stop.

And the worse of it all is that probably these thousands of bankers with well above average salaries overstretched their finances and some of them will have to file for bankruptcy. Perhaps they can collateralise their mortgage, restructure their unpaid credit card bill or securitise dog and kids.

.calvin

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