RBS Bonuses…

In Robert Peston’s latest blog post he discusses the dilemma facing Gordon Brown and the RBS board in deciding what bonuses should be paid, if any at all.

There is considerable anger from the general public about ‘bankers’ and the idea of any of them getting bonuses is clearly abhorrent to them, as many perceive it as tax payers’ money being used to fund lavish lifestyles for ‘bankers’.

One issue I have with many recent news stories about banks, is this word: ‘bankers’… it seems to imply that everyone working at a bank is directly involved in making the lending and risk-taking decisions which is plainly not true. From my own perspective I prefer the WordNet definition:

a financier who owns or is an executive in a bank


Out of the 100 (at time of writing) comments, there were probably only about 10-15 comments that spoke any sense and from a rational perspective. The rest were, in my opinion, clouded by anger and ill-thought.

Some make the point that as de facto shareholders, tax payers should be desiring RBS to perform well as a commercial entity to enable the government to make a profit when returning RBS to fully-privatised ownership. In this case it is imperative for RBS to retain its best people, the ones who have the knowledge and the wherewithal to return RBS to full health.

Over on his Knowledge and Making blog (seen via his comment on Peston’s blog) Leigh Caldwell argues there is no reason for shareholders to object to bonuses, and proposes a bonus structure which:

gains value only when RBS shares recover to a certain point and the state’s stake is reduced below a certain level (maybe 30%). The number of options awarded to be based on past performance; the future value of each will be derived from RBS’s success in giving the taxpayer a return on our investment. (Leigh Caldwell, Knowledge and Making)

Should anyone at RBS get a bonus?

To answer that question you have to first consider how a bonus is determined. In its simplest form it would probably be

Excess Profits ÷ Number of Employees

But in most large organisations they will not be determined in this manner, they will most probably be based around the annual performance reviews (individual, team, departmental and divisional). So if the individual has had an outstanding year and had a bigger impact on profitability than predicted they should be rewarded, similarly if the team has performed beyond expectations they should be rewarded, and so on.

For people to declare that everyone at RBS should get nothing because of the losses incurred in a small part of the bank’s huge operations is not being realistic. Are they saying that Joe from an operations team who came up with and implemented a more efficient and cheaper method of maintaining/restocking ATMs say should get absolutely nothing, because Geoff the trader has invested too heavily in CDOs losing RBS millions?

In answer to my question… Yes, RBS should be paying a bonus for 2008, but only to those who have exceeded their predicted performance and based on their team and divisional performance too. As owners, tax payers need to understand that it is in their best interest to see RBS return to full health. We can only hope that Gordon Brown does not take the populist path and ban all bonuses, which will only lead to long-term pain.


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One Response to “RBS Bonuses…”

  1. Leigh Caldwell Says:

    Thanks for the link Richard – I do try to be a calming influence on some of the Peston commenters. A hopeless battle, I’m afraid.

    I like your articles and have added you to my blogroll on Knowing and Making. I also maintain a list of UK economics-related blogs at http://www.knowingandmaking.com/2009/01/uk-economics-blogs.html

    If you’d like to suggest a description of the topics your blog covers (either by email or in a comment on that page) I will add you to the list.

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