Page last updated at 23:37 GMT, Friday, 26 February 2010

Q&A: Do bankers really need their bonuses?

Fan of 20 notes
Money talks - but does it have to shout so loud to get a banker to work?

As the banks reporting season continues apace, the scale of bankers' bonuses is again under the spotlight.

The banks continue to show the scars of the credit crunch - but to many observers it seems those responsible for the financial crisis are still riding the gravy train.

BBC News asked Chris Roebuck of London's Cass Business School to set out the arguments.

DO BANKERS NEED BONUSES?

Every job needs to offer an incentive - hence the idea of performance-related pay.

That also minimises risk for organisations, paying for performance after it has been delivered, rather than before in the hope it will be.

In any job, the question is how to balance salary and bonus.

In theory a large bonus and a small salary is the best combination, but people need money to live on, so in many organisations it might be 75% salary, 25% bonus.

In sales that ratio can be as far opposite as 10% salary, 90% bonus.

In banking, the base pay is more than most people get anyway so bankers can live on that without much problem.

So there are no issues in paying bonuses that could be 80% of total remuneration.

DO BONUSES NEED TO BE SO BIG?

The only reason one bank needs to pay such big bonuses is that other banks do the same

Yes and no!

The main issue is that bank transactions themselves are just so big in financial terms even a very small percentage bonus on a deal done is a big amount.

From the individual banker's perspective, they want to be paid what the market rate is for what they do - as does anyone.

But the only reason one bank needs to pay such big bonuses is that other banks do the same.

If all the banks paid a much lower rate then that would be the level bankers would accept - the market rate.

A key question is what other industries pay. When you get bankers leaving banking because they get paid more outside banking, then that suggests the pay has dropped to the minimum level.

That is too low, and if you want the sector to do well and bring in money to London, the optimum is about 20% higher than that point.

Here, bankers would stay in banking, bring in profits for London and earn a fair wage.

The problem is that this has to be applied globally or the bankers, and banks, will just move to where the pay or profits are higher.

So the answer lies with the politicians to unite to make that happen.

HAVE BANKS BEEN PUSHED INTO AN UPWARD SPIRAL FOR BONUSES?

Yes. Since the 1990s, every time the economy has slowed banks have laid off staff.

When the market went up again they all rushed to get staff in. In that rush they couldn't get enough staff quickly enough so they started to offer higher than market rates to poach people from competitors, maybe 20% above market rate to double market rate.

Those who were offered these sums to get them to leave would then tell their employer to match it, or they really would leave.

Thus their bank has to match it or lose good people.

So in one short period market level pay could have gone up by 30-100%.

This doesn't happen every year but if it happens every 4-5 years from 1990 to 2010 - compared to most other people's wage rises of maybe 5% per annum - the gap just gets wider and wider.

That is how we have got to where we are now, and this has literally happened again in the past month with Bank of America and UBS offering certain groups double the market rate from 2009.

This is just the free market at work, limited supply but high demand for the best people.

IS THERE ANY PROOF THESE BIG PAY DEALS ARE NEEDED?

View of Canary Wharf
These massive bankers' pay deals are needed - no single bank or country can refuse them without facing financial disaster

The numbers of people and the numbers of banks may be shrinking but the size of the financial market is actually getting bigger.

For the banks, it is not about how many people they have, it is about how much market share they can get and how much profit they can make on it.

More money is going to be moving about the world in the future and that's how the banks make their money, taking a small cut on those vast amounts of money being used for various purposes to oil the wheels of world business.

And we all need that to happen to put money in our pockets as well, we need the world economy to flourish to make sure we also get paid.

But the only reason these massive bankers' pay deals are needed is that no single bank or country can refuse them without facing financial disaster.

They are in a free market driven across the world.

Unless the politicians globally get together and find a solution that gives bankers fair and reasonable pay for the work put in, makes the global financial system more stable and reduces the risk of another crash - then its all going to happen again one day.



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