Page last updated at 10:45 GMT, Friday, 16 October 2009 11:45 UK

Should we be angry about bonuses?

By Anthony Reuben
Business reporter, BBC News

The big US banks, most of which have received huge amounts of taxpayers' money, have been reporting three-month results.

Champagne glasses
The good times are back for some highly-paid bankers

JP Morgan Chase and Goldman Sachs have reported big profits and set aside billions of dollar to pay bonuses to their staff.

They all have staff based around the world, who will also be paid bonuses.

But is it fair that, having been blamed for the global economic downturn, their staff are already reaping huge rewards as others struggle?

YES, WE SHOULD BE ANGRY

There can be little doubt that the profits reported by the likes of Goldman Sachs and JP Morgan Chase could not have been achieved without government help.

Prof Stefano Harney
The taxpayer ultimately is the investor who ought to be reaping the results and getting the bonuses this year
Prof Stefano Harney, Queen Mary School of Business and Management

Some banks received little or no direct injection of taxpayers' money, but even they benefited indirectly from the rescue of the overall financial system and the amount of extra cash that governments pumped into their economies.

"There is a question of whether or not these results... are enhanced in a certain way by the taxpayer," says Professor Stefano Harney from Queen Mary School of Business and Management, who has campaigned for windfall taxes on bonuses.

He argues that "the taxpayer ultimately is the investor who ought to be reaping the results and getting the bonuses this year".

It is easy to be angry when governments are facing huge deficits - and having to raise taxes or cut services to fund the amount of money they have had to spend on bailing out banks.

Also, one of the points of the bail-out was to help banks build up the amount of money they had in their reserves, so that they could get back to normal lending practices.

Should the billions being paid to bankers not be kept to bolster the banks' balance sheets instead?

Finally, if we are concerned that the old bonus culture fuelled excessive risk-taking, are the bankers trying to reap bonuses today any less likely to bring the global economy to its knees once again?

NO, IT'S NO BIG DEAL

Goldman Sachs, which tends to pay the biggest bonuses, has received relatively little government help.

Barbara Stcherbatcheff
Bailed-out banks need to be able to compete for staff just as effectively as non-bailed-out banks
Barbara Stcherbatcheff, former banker

It has already repaid the loan it received with interest, which it says was equivalent to a rate of 23% a year, so US taxpayers have already benefited from lending it the money.

The main thrust of the row about bonuses has been that there should be no rewards for failure. But Goldman Sachs has not failed - it has made a great deal of profit, which it may argue was due to the skill and hard work of its staff.

It also pays billions of pounds or dollars in taxes, while its employees pay taxes on their pay and bonuses, so the government is benefiting from its success.

For banks that have been directly bailed-out by taxpayers, there are also good reasons to pay bonuses.

"Bailed-out banks need to be able to compete for staff just as effectively as non-bailed-out banks," says Barbara Stcherbatcheff, former banker and author of Confessions of a City Girl.

"If governments want to maximise their chances of getting their money back, they [the banks] need to be profitable and the only way to do that is to retain the top talent," she argues.

Finally, there have been reforms to the way bonuses are paid.

New regulations from the Financial Services Authority come into force in the UK in January. These rules will ensure that bonuses can no longer be guaranteed for more than a year, and that senior employees must have their bonuses spread over at least three years.

Leaders of the G20 countries have also discussed making banks pay bonuses in shares. They say there needs to be a mechanism to allow them to be clawed back if investments turn out to have been a mistake in the longer term.

If measures can be taken to ensure bonuses provide the correct incentives, they are an important way to encourage bankers, many of whom do work that is a good thing for the economy.



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Bonus reform: country by country
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