Hester's bonus
I was on Sky News earlier today talking about Stephen Hester’s £1m RBS bonus. To tell the truth, it isn’t a subject I relish tackling – there’s more nuance there than it’s easy to communicate in a short TV debate. For one thing – and I made sure to stress this upfront – I don’t believe that RBS should exist today, at least not in its current form. Bailing it out in 2008 was a big mistake, and if we’d let it go to the wall, we’d be much better off now.
And then there’s the point Gordon Kerr made in his recent Adam Smith Institute report The Law of Opposites, that bonuses are sometimes driven as much by the flaws in the International Financial Reporting Standards, which allow banks to recognise years of very uncertain future income as current profit, as they are by genuine performance. I decided not to bring this up. Nor did I get the chance to nail the real corruption at the heart of the financial sector – the central bank and its constantly expanding balance sheet.
Like most libertarians, I am ambivalent about the financial sector: on the one hand, the government should not interfere with free enterprise or use Britain’s most important industry as a political punchbag; on the other hand, there’s more than a whiff of crony capitalism around parts of the financial world, and I hate having people assume that everything that happens in the City must, by definition, be the product of the free market. That just ain’t so.
All that said, the furore over Hester’s bonus makes for a truly unedifying spectacle. The fact is that the taxpayer has been lumbered with 82 percent of RBS, and is on the hook for billions of pounds of liabilities. I’d never had put us in this position, but we are where we are and if we want our money back we’d be well-advised not to run RBS into the ground. The company needs top-quality leadership, and in the banking world that costs something. Moreover, we need to remember that this bonus is being paid entirely in shares, which seems a good way of aligning executive interests with shareholder (i.e. taxpayer) interests. That’s no bad thing.
My opponent, The Guardian’s Philip Inman, made the usual point that (a) nobody deserves to be paid that much and (b) bankers shouldn’t get such big bonuses when they’re already paid seemingly enormous salaries. My answer to the first point was a simple one: who are we to determine how much someone ‘deserves’? As soon as you interfere in the market here, everything becomes a deeply politicized value judgement. The second point is, I think, based on a lacking of understanding of the way financial firms operate. The reason so much of bank pay comes in the form of bonuses rather than fixed salary is that bank revenues are unpredictable and volatile. In that context, a (relatively) low basic salary with a large variable component makes perfect business sense. Not everything bankers do is a conspiracy against the public interest.
Ultimately, the point I want people to take away from my appearance is this: if taxpayers own 82 percent of a company, it is right that the government closely scrutinizes the executives on their behalf. I’m all for giving more power to shareholders. But in doing this, it is vital that the government pursues taxpayers’ economic interests, not their own political ones.
