'Because you're worth it', even though you're not

Bankers and bonuses - to pay or not to pay, that is the question, writes Sheila O'Flanagan

IT IS BONUS season in the financial services sector, but the atmosphere in the champagne bars and nightclubs will be muted this year and the luxury car showrooms deserted as the erstwhile Masters of the Universe contemplate the depleted bonus pool.

Meanwhile, the banks' senior executives are coming under more and more pressure to "forgo" bonuses for 2008. I am amused by the term "forgo", which implies that they are giving up an entitlement. A bonus is, of course, supposed to be a reward for good performance, not a generous handout for reckless lending and presiding over the destruction of shareholder value.

This means that there is no conceivable way in which anybody working in any senior position in a bank can justify a bonus this year. But, presumably, in suggesting that they are "forgoing" an entitlement, they are letting us know that they share our pain.

Goldman's Lloyd Blankfein, therefore, won't be setting new records for his end-of- season swagfest.

Blankfein's bonuses have always been record-breakers on Wall Street. He was awarded a staggering $68 million (€51 million) in 2007 on top of $54 million the previous year, so even with his generous acceptance of a big fat zero now, you can't help feeling that there won't be too much bleakness around the log fire chez Blankfein on Christmas Day.

Blankfein's astonishing payouts regularly generated a lot of media chatter about where the bonus culture would lead and, regrettably, it's even worse than most people feared.

The pro-bonus argument was always that these executives were driving their firms towards greater and greater profitability; that reward was linked to performance; that criticism was envy; that it was wrong to be emotional about someone else's good fortune. Oh, and that they were the drivers of global economic growth.

Rather unfortunate, then, that they drove it off the edge of a cliff.

Recipients of big bonuses, whether in banking or in industry, have a bit of form in relation to ultimate doom.

Kenneth Lay, chief executive of Enron, received $35 million before the company became the biggest corporate failure in US history. Angelo Mozilo, founder of subprime lender Countrywide Financial, was able to cash in stock options which netted him $121.5 million just before the share price collapsed.

Mozilo's is an interesting case of how the bonus structure can work. His bonus was based on growth in earnings per share (EPS) but, even when Countrywide's EPS declined by 13.2 per cent, he still picked up $17.3 million based on a complex formula used to calculate each year's bonus.

In fact, in order not to receive anything at all, the EPS would have had to decline 100 per cent. Bankers are good with formulas, if not subprime debt.

Even after failure, some of them still want to squeeze the last drop out of the pool. John Thain of Merrill's (which avoided collapse after Bank of America stepped in) reportedly asked for a mere $10 million addition to his pay cheque this year, down from his original expectation of $30 million.

Thain's view was that it was deserved as he helped to prevent an even worse crisis at the firm - a comment which is breathtaking in its arrogance - but being a banker in the boom years has been all about arrogance. Anyway, the word now is that Thain has also chosen to "forgo" his bonus.

The billion-dollar question is whether attitudes of senior executives towards their bonuses will change in future years and whether the entire business community accepts that inappropriate bonus structures will foster an inappropriate attitude towards risk.

Marcel Ospel, the former chief executive of Swiss bank UBS, has taken the pain of "forgoing" a step further and has actually handed back his $27.5 million bonus, perhaps influenced by the demonstration outside the bank's offices by people incensed at the consequences of the bank's policies.

Despite this sudden burst of frugality, though, it's hard not to think that bankers will once again begin to manoeuvre themselves in the coming months into positions where they remind us that they have to pay high salaries and bonuses in order to recruit and retain the best talent possible, in order that they can work their way through the difficult times.

However, in an industry that has shed so many jobs worldwide, the talent should be a lot cheaper. Their future bonus structure shouldn't focus on unsustainable short-term growth which doesn't serve either the company or its shareholders.

The bankers have received most of the opprobrium for the current economic crisis and much of it is richly deserved. At the same time, they do hold a mirror to ourselves. We have all become masters of short-term thinking, seduced by the phrase "because you're worth it" even when, in our heart of hearts, we sometimes know we're not.

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