Mervyn King’s Horlicks has just worn off and he has woken up to the fact that City bonuses are high. Breathtaking! He is so on the ball that he makes Ronaldo look like a one-legged tap-dancer.
Mervyn!!! The outrageously high bonuses, boni or boners are not a new phenomenon. In fact Joseph Stiglitz, the Nobel Prize-winning economist said exactly what you’re saying about a month ago. Mind you, what with one thing and another, I suppose that you’ve only just caught up with your reading.
The primary reason for the outrageously high payments to the designer-labelled barrow-boy City slickers is the over-simplified reward system. The City rewards the “ups” but does not penalise the “downs”. That encourages risk-taking in a big way. A trader can make a large bonus from the profit on a deal but when that deal or the share price subsequently falls, there are no sanctions.
Here is an idea from Spygun’s many years experience in Financial Services, illustrated by an example from the life assurance industry:
In the good old days when life was simple, every day was sunny and back doors were left unlocked, a life assurance salesman would be paid what was known as “indemnity commission” on any contracts that he sold. If the salesman sold a £100 per month policy to a client , he earned say £1000 in up-front commission. Over the next twelve months, the client paid his £100 per month and at the end of the year, the salesman’s commission had been paid for. However, if the policy lapsed in the meantime, the commission was “clawed back” on a pro-rata basis. That discouraged salesmen from selling policies to high-risk clients.
With the sorts of systems that all banks and financial services companies currently operate , it would be a comparatively simple matter to create a payment system which was more equitable and which took into account the often negative consequences of trading.
The Life Assurance companies employed people who earned millions in commission from unprofitable contracts and eventually, the Financial Services Act helped the industry to rewrite the rules , resulting in a far more sensible pay structure and a much less aggressive culture.
It is now time for those nice people at the Financial Services Authority to loosen their cardigans, bare their teeth and take control.
The argument of having to pay obscene bonuses in order to hire “the best” has been used before. “The best” used to mean the most aggressive and most ambitious salesmen.
We now have the opportunity to enter an era where “the best” means the best-qualified, the most knowledgeable and the most professional.