The fuss about bank bonuses will run and run. The Royal Bank of Scotland, recipient of £20bn of taxpayers' money, is planning to give bonuses to its senior bankers and City traders that might well run into millions for some of them. And the Treasury seems to have agreed, provoking much public outrage. Why should a failed bank, especially a state-owned one, pay bonuses at all?
But there's a great deal of misapprehension about bonuses. They are actually a way in which banks, and other businesses that face upswings and downswings, manage their wage bills. For most companies who pay staff bonuses, it's a way to manage wages, not inflate them. Bonuses are tied to the performance of the individual or the company. So if times have been hard, the wage bill can be reduced, and when times are good, it's made up again.
Sure, there's a lag, because you can't calculate the bonus until your accounts are done and dusted, which might be nine months later. And these are contractual obligations: because things are bad now doesn't mean you can just tear up contracts for the sake of political correctness.
There is also the point that bonus payments incentivize people. When traders are paid according to the business they generate for a company, they are incentivized to generate more. If people are bringing in billions' of pounds' worth of business, isn't that indeed worth millions? Of course, you need to make sure that they are bringing in good business, and not just selling more mortgages to people who can't afford them. And some bank executives have certainly made mistakes on that front. Incentives need to be carefully managed (as Gordon Brown should know: witness all those people waiting in ambulances and corridors because the A&E department don't want to go over their target time for treating people whom they admit).
