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Banker Bonuses. Are they really that wrong?

Discussion in 'Speaker's Corner' started by Judgeneo, 9 Jun 2010.

  1. Judgeneo

    Capodecina

    Joined: 15 May 2010

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    To the average person, talks of bankers getting hundreds of thousands of pounds in bonuses each year annoys them, in some cases rage is induced. But what if you ask yourself, why do they earn so much?


    Imagine you are a stock trader. You deal with budgets in the millions, and you do a damn good job, and make over 50% profit with ease.
    Now if you got paid just your salary ( say... £100k), then you have been given a mere quarter of what you have earned. So you are given a bonus proportional to your performance and all is good and well.

    Now to me I see no harm in this at all, I think it is a very fair system. However I do have some gripes with the reality of the banking world.

    1. Some people are still paid bonuses after loosing money for their company.

    2. The guys at the top, this is where the corruption is. The heads of banks are often on their friends (possibly their own) committee where their pay is decided. These peoples bonuses are far far too huge. Instead the money should go more to the share holder.


    And before anyone says that a 50% profit is unreasonable, I'd say that is a very low performance for a banker.
    Although having no job experience as a stock trader. Earlier in my year at university all of the Maths/economics/stats/business etc... students were invited to join what was called the UBS challenge, basically the goal was simple, you are given £100k fake money to 'invest' in the stock market over the course of 1 month, the top perfomers go to the final where there is a posh hotel and brilliant outdoor activities. Also if you answered 10questions on UBS then you were given an extra £100k to play with. I myself only made ~20k but I had one friend who made 50K and another who made ~120k.
    10%,25%,60% respectively. If you say on an average month we make half as much as this, then take that for the whole year, your looking at profits of 80%,410%,and 2300% respectively. Also bear in mind that I spent around 2hours a week maximum on this game, not the 12hours a day that a stock trader will do. (Btw, around 8 of us got through to the final and had a great time :D )


    So do these people really get paid too much? Probably not no.
     
  2. Amnesia

    Sgarrista

    Joined: 22 Jun 2007

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    i don't see why someone should get hundreds of thousands as a bonus for losing money...or have i misread the post :p
     
  3. Judgeneo

    Capodecina

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    :p One of my two gripes is that some bankers loose money and still get bonuses
     
  4. Amnesia

    Sgarrista

    Joined: 22 Jun 2007

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    Location: Buckingham Palace

    it's LOSE lol


    yeah what exactly is the bonus for if they have done a bad job.
     
    Last edited: 9 Jun 2010
  5. semi-pro waster

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    You might say that but since you don't have any real knowledge of what is or is not a good level of profit for a banker it's simply a guess without taking into account real conditions. While a shares competition is fun and may relate the chances are that it isn't terribly realistic - I did a very similar share competition in my final year of High School as part of a team and we doubled our money then but didn't even finish in the top five teams nationally from what I remember (I think 7th but that's beside the point). Having done it I don't think that representative of the normal run of the markets though.

    I'm rather curious about your percentages there as I can't follow the explanation - are you saying that you made 10% on the £200k? Ok, that's fair enough but how is making half of your current level of profit (we'll ignore overheads etc) i.e. £10k or 5% going to multiply up to 80% unless you're on a 16 month calendar?

    It's also worth remembering that spending more time looking at your trades could lead to making decisions based on very short term trends while sometimes you may in fact benefit from not being as aware or able to make trades regularly. That may not be a common occurrence but it could have impacted on your profit figures in the short run.

    Then you've got an issue with how the contracts were laid out, these bonuses will be legally enforceable and that is why they have to be paid irrespective of the profit/losses that the trader posts.
     
  6. Dolph

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    I don't have too much problem with bankers bonuses, giving a bonus when the company loses money makes a lot of sense if the losses were lessened by the actions of the individual (eg RBS' investment banking division returned to strong profit way before the rest of the company and continues to lessen the losses the company as a whole suffers).

    Bank bonuses have become a good scapegoat for the banking crisis that largely resulted from government intervention in the market approving of and encouraging bad behaviour, and damaging the market's natural protection mechanisms (such as the credit rating agencies) by altering their job from a service to buyers to a requirement for sellers operating in an oligopoly.

    The governments of the world certainly don't want to acknowledge their involvement in the problem however.
     
  7. Gaidin109

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    Joined: 12 Jul 2009

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    They are only wrong if they are funded by the Taxpayer or the Bank in question is loss making. Bonuses should be based on performance and profit of not only the individual involved but the company as a whole.

    Some cases where quaranteed bonus payments are contractual regardless of performance are wrong, but as long as the profit margins can sustain them without adversely affecting either the business model, shareholders or meaning services are cut or charges increased just to make them then they are fine.
     
  8. scorza

    Caporegime

    Joined: 22 Jun 2004

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    That's the problem, during the good times it's too easy to make big sums of money - in a growing market it's actually more difficult to lose money. So why should people get disproportionately rewarded for you know, actually doing their job? Bonuses should be for succeeding by going above and beyond the call of duty, not merely doing what's easy and happening to look good because of external factors.

    One problem with massive bonuses is that they incentivise excessive risk taking to the point that banking becomes little more than gambling. Look at the case of Jerome Kervial, whose trading set off 70+ alarms at Societie Generale I heard last night, but all of these alarms were ignored by management because his positions were looking so good at the time.

    There's nothing wrong with banking as an industry, but for a long time know the banks have lost sight of what they exist for, which is making safe and steady investments for their customers.
     
  9. toshj

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    I don't really have an issue with banker's bonuses. As Dolph pointed out, the majority of RBS' Global Markets division performed incredibly well in the light of the writedowns that were needed due to the actions of the credit and structured credit business. Most people think that most bankers lost money/had a negative PnL over the last couple of years, whereas the majority of tier 1, 2 and 3 banks made a fortune in FICC and equity divisions.

    With regards to Gaidins' point, do you think its worthwhile not paying a bond saleperson at RBS who may have made the bank £10mn despite the bank making a loss? Surely that approach would lead to most people leaving an embattled bank (despite them personally turning a profit) and the bank would fall further into trouble. Imagine trying to recruit salespeople, traders, quants, structurers, etc. to a loss-making bank and telling them that despite earning a strong profit personally, they won't be rewarded at all for trying to get the bank back on track.

    Also, in certain circumstance I believe guaranteed bonus' are a must. Why would anyone talented leave a Goldman Sachs, Morgan Stanley or JP Morgan to go work at a tier 2 or 3 bank? If they weren't guaranteed a bonus, then no one would leave and the talent would invariably remain at the top of the market.
     
  10. Gaidin109

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    Which is why I said not only on individual performance. Bonus' should be progressive, if an indivudual performs exceptionally then of course a bonus should made, but it needs to be balanced with the overall profitability of the company.
     
  11. toshj

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    I see - I completely misread your point. I do understand that principle, and in an ideal situation i think that would be the preferred chouce for everyone, however its a highly unlikely situation. Credit and structured credit makes up for about 12% of a banks workforce (from what I understand), so its not necessarily fair to penalise the other 88% of profitable people within a bank's front office (obviously when it's a government-owned institution, then a completely different model might have to be introduced). However, when its written in your contract that you may receive a "discretionary bonus at the end of the year" then you shouldn't really be expecting a thing.

    Macquarie Bank have enforced a rigourous compensation structure recently, and one that in a fair market would prove quite successful (deferring some bonuses over a period up to seven years), and this could be a form that institutions adoptn in the future, but when most people are thinking "I've only got 5/10 years left in my career at a bank and its time to start getting paid well for the remainder" then there will always be an exodous of talent.

    If everyone adopted this model, then it would only take one institution to revert bank to a 2007 compensation style for it all to fall apart.
     
  12. Yamahahahahaha

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    You're getting a bank and a building society confused.

    Banks are only there to make profits for their shareholders. Whether that has any societal benefit beyond the small number of taxes they pay (After significant tax avoidance) is debatable.

    Building societies consider each depositer as a shareholder, and will always act in the best interests of the customer.

    The current stupidity / rot we're seeing from Nationwide is partly down to the effluent staff spilling over from banks. People who do not understand the ethos or mission statement of the company.
     
  13. rypt

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    I'm no socialist (I'm right of centre) but I'm not sure how you can justify someone earning 200k, 300k a year for not doing anything "unique", let alone earning 1mil a year.

    As for the whole they make millions for the bank, what about people in other industries. Take the design team of say the iPhone or iPad, they have made billions for Apple with those products, should they all get a huge bonus which is a percentage of the money Apple made ... or should they get a good salary, and then a decent bonus (no more than say 25% of salary) for doing their job so well?

    The bankers will survive just fine if they have a 250k basic and a 75k bonus instead of the 300k basic and 600k bonus

    As someone said, bonuses should be for doing extra, putting in dedication etc .. not for doing your job
     
    Last edited: 9 Jun 2010
  14. kefkef

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    The problem is, that if you perform well and earn your salary of 250k and your 75k bonus, a headhunter will come along on behalf of another bank and offer you 350k and 100k bonus. Now does the current employer stump up more cash to keep you, or allow you to go to a competitor and possibly give them the edge? I would hazard a guess that most of these types of job would then hit a 'ceiling' in pay/bonus Vs performance/profit and the headhunting stops (until someone retires etc).
     
  15. Xordium

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    I can understand the need for companies to pay the amount they need to get the right people but there is something morally corrupt here. These people are getting bonuses for doing their jobs well - fair enough - but you are supposed to do your job well. And the amounts are just obscene to the average person.

    Do teachers get more money for teaching well - do paramedics get more money for doing their job well - but the very people who argue for these bonuses are very often the ones who are quite happy to negate the bonuses for such public workers.

    Getting a bonus when you do not perform well though is just plain wrong. If it was kept to those who were successful then their is an argument for it but the current climate just appears to be corrupt and riddled with greed. All along with an attitude of having such power that such behaviour can not be questioned or changed. This used to happen with the trade unions and it was a good thing when they were stamped down on a bit.
     
  16. rypt

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    There are currently more people interested in doing banking etc than there are positions, as such it is an EMPLOYERS market.

    I'm also feel that the majority of institutions would follow each others lead and lower bonus levels, since it would make sense from a business point of view. The skillset of the bankers is not unique or that exclusive, as such even if you lose 1 member of staff I'm sure you can find another one to take his place.
     
  17. Judgeneo

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    Sorry if it wasn't clear, if you make an additional 5% each month that works out as 1.05^12 = 1.7959 which is about 80% over the year


    The problem with comparing a trading bank to a company like apple is the number of employees. Apple has to pay for much much more staff across a wide skill set. In that sort of environment, how do you determine which department made the ipod a success? Was it the man at the top for taking a gamble, the researchers and engineers that made a good product, or the guys in marketing that made it the must have product? There are plenty of fantastically designed products that make next to no money thanks to bad decisions elsewhere in the company. In the banking industry it is far easier to reward individual effort
     
  18. ntg

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    Is that why they are losing staff left, right and center to competitors? Macquarie fails to understand that you just can't go against the flow like that. If people who were expecting to get millions are getting thousands, well, they will leave.

    And that is exactly the point of why they are paid craploads of money even if what they are doing is nothing "unique" or not rocket science. Simply because a trader (or any front office staff) that can pull in millions in profit in his P&L book every year expects a fat bonus. If he doesn't get it he will quit and open his own fund (as many have done especially in the expansion period up to 2007) and rake in the cash all for himself. So which would the bank managers prefer? Well, they couldn't give a rats ass if any Joe Bloggs can do the same job as their trader, they only care to keep the money coming without having the risk of "what if the next person is just not good enough", and even if he is then they will have to pay him a fat bonus otherwise he will leave too.

    It's simple, banking is an extremely capital intensive business, too few workers and too large profits, so somehow they have to be split among them. The shareholders are kept at bay with fat returns and divs while the workers get a small slice of the overall profits but still huge on a per-person view.

    As for the "why someone who lost 50% of his bank's capital" in a year (or equivalent arguments) should get a bonus, well, you have to look at a) how much did the competitors lose, if they lost more then he deserves a bonus for losing less because it was obviously not due to his shortcomings but the market in general (very-very rough example) or b) look at his contract if it's crappily put together

    That's my take on things in general terms.
     
  19. ntg

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    Don't forget that each member of staff you lose goes to a competitor. If you lose a good trader then you will have him against you. The question is, can you find someone BETTER for less money than the one you let go? Otherwise it's a bad decision.
     
  20. scorza

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    Joined: 22 Jun 2004

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    Banks are doing a great job of making profits for their shareholders - keep up the good work chaps.

    Clearly something went fundamentally wrong with the banking system, and I suggest that the reason is that they forgot what they are there for, and the how they make profits for their shareholders. Any business that loses focus on its customers will have difficulties, excessively so for the banks.

    What stupidity/rot from Nationwide are you referring to?