The Royal Bank of Scotland (RBS) directors have tried to justify paying their investment bankers a massive £1.5 billion in bonuses with a number of arguments:

  • In order to remain competitive and retain the most talented banking professionals, they must pay the going rates for their industry.
  • They say their legal advisers have told them they’d would have to resign, if they failed to pay the bonuses, as they’d be in breach of contract.
  • The RBS investment banking division has made around £6 billion profit this year, for which £1.5 billion is a fair bonus total.

So let’s look at these claims:

  • The only people who seem to think the current banking industry remuneration levels are fair, are the bankers. This is an opportunity for the rest of the world to break this ridiculous, self-serving and self-perpetuating cycle. The argument that RBS would lose their best people fails on two counts: Firstly, if they’re so good, how did RBS and most other financial institutions get the world into its current monumental fiscal mess? Secondly, until someone makes a stand on this issue, banks will always be able to use this argument and maintain artificially inflated income packages.
  • If the directors would be in breach of contract, surely the government, as our representatives – currently 70% of RBS is publicly owned – are responsible for ensuring that any contracts drawn up support the nation’s best interests, rather than those of a few excessively over-rewarded individuals. Also, if they really want to resign, let them; let’s create an opportunity for some ‘new blood’ to reach the highest levels of their profession, whilst retaining a realistic view of their earnings potential.
  • The £6 billion profit figure pales into insignificance, compared to the £25 billion pounds of our money the government used to refinance RBS. The thousands of small and medium sized businesses RBS and its fellow organizations refuse to lend money to could all turn a profit if they were able to enjoy the same type of luxury (also see “The recession isn’t ending“).

Executive bonuses, in banking and other sectors, should be set at realistic levels and dependent on real success. High achieving professionals should be rewarded well, in order to provide genuine incentives and retain the best people. However, simple measures, such as deferring bonuses for three years (already a common practice in some industries) and paying some rewards in the form of share options, could reduce risk taking significantly; it could also encourage behaviour more supportive of an organization’s long term future.

Alistair Darling must defend the nation’s best interests in this matter and, if necessary, let the RBS directors walk. This could send out a strong message to the senior executives of other institutions with or without significant public investment. Perhaps other nations might take note too?