An insiders view of the current bonus controversy. Cut and pasted from elsewhere online and deserving of a crystal mark from the Plain English Society-

The whole bonus thing is not at all straight forward and the right and wrongs of it can not be generalised as “no-one should get one”. As another user pointed out there are many divisions of a bank and many departments within those divisions. For simplicity’s sake I’ll limit it to two, Retail and Investment. Now in general the Retail bit is the High Street branches that you all know and love/hate. These generally contain client facing, hard working people who have, mainly, done everything asked of them in 2008 and maintained there divisions profits. Yes, some of there mortgage lending decisions have been a bit suspect and were based on a ever increasing housing market but in general they have been OK and certainly in the case of the major high street banks not generated losses that would cause major issues to the bottom lines of RBS, Lloyds, Barclays or the like. These people are generally at the lower end of the pay scale and the bonus is a welcome top up, as it is in any firm who gives them. There bonuses are generally (relatively) small but there are a lot of them, so it soon adds up (for RBS think 100,000 people x £1000, that’s £100m before you start). You could argue that the bonus culture is simply wrong for them (and I’d actually agree with that) but that’s how banks work. How many of you would work a lot of extra hours for no pay during the year under the promise that “it will be made up in your bonus at the end of the year”? That’s exactly what these people do.

Then we get onto the bad boy Investment Bank division and that’s where these huge losses have come from. Now 99.99% of you will have had nothing directly to do with these. They don’t have individual clients (unless you have a net worth of over $10m) and deal mainly with corporate clients, pension funds etc. Again there are many sections in a Investment Bank but the well known bits of it are the ‘professional gamblers’ or Traders as we know them. And yes they gamble with sums of money you cannot even start to imagine. Hopefully they win more than they lose. These bunch of Equity (share) trades are also the first of the “bonus problems”. Although the traders are by no means poorly paid, a lot of them are on commission and that is written into their contracts. They are therefore legally entitled to a percentage of the money they make for the bank. You either pay it, or they take you to court and you end up paying it (plus legal fees). In 2008 the Equity and Forex traders made good money and hence are owed bonuses and these are the ones that make the headlines i.e. Banker gets £1m bonus!

Now, as well as these ‘front office’ traders the Investment Bank have a huge number of “Back Office” employees. These are very similar to the people in the Retail banks and basically keep the computer systems running, deal with payments and all the other things that a big company has to do to operate. The back office employees probably out number the traders 10-to-1 and usually loath them at least as much as you do. Again, these people are on no overtime but ‘it will be made up in your bonus’ type deals like the retail side. It’s verbal not written into contracts and if anything they work even longer hours than their retail brothers.

For all of these people 2008 has more or less been business as normal. Where it has gone horribly wrong is in the fixed income and deposits and risk management divisions. The former of these were the relatively small groups of people who were playing with the American sub-prime mortgages and so on and the latter is the department that is supposed to weigh up the exposures and risks to the bank and stop over exposure etc. Now for reasons I can’t even begin to understand that’s gone tits up big time. The losses and write downs that these groups have generated are staggering (in an aircraft context, the losses of my bank alone could buy the entire planned Euro fighter production for the UK at least twice over). Those losses have devastated the cash reserves not only of the Investment Banks but the entire parent groups. With no cash reserves- no lending. No lending means housing markets crash, businesses can’t get loans to expand and so on. Also there is a legal requirement for banks to have a certain percentage of there reserves in ‘cash’ so you, me and everyone else can go to the hole in the wall on a Friday night and get money. If you do not have that cash on hand the Bank of England can force you to get it buy selling assets which in a falling market means more losses etc. Now these two groups of people are not getting bonuses mainly because they are no longer employed (they went months ago), along with a lot of the senior managers who should have known better. In fact most Investment Banks have shed something like 15-20% of their staff in the last year.

Some banks, RBS being the prime example, compounded this issue by making merger decisions that were based on greed / pride than good business sense and for that there is no defence at all.

If the Banks don’t pay bonuses will the top talent walk? In a simple word yes because the top investment banks in the US and Asia will continue to pay commission related bonuses and if you are good they will poach you and that will be a very bad thing for the UK Banks. The reason I say that is because to get back the billions in losses the banks have to trade and like it or not it’s the key traders who make a lot of money for the banks (that’s why we pay them so much!). If you are not making money on trading (and let’s face it with interest rates at 1% your not going to make it on loans) then the recovery of the banks will take a lot longer. And until they recover you are not going to see government loans repaid, or high movement in the inter-bank money markets that are key to the mortgage markets. Until they are profitable remember they are not going to pay a penny in corporation tax, so the government is loosing billions in revenue as well, which ultimately we will have to make up with personal taxes. Also one hell of a lot of all your pensions and investments are tied up in banking stock. Those have fallen off a cliff in the last year significantly reducing your investment values. Getting the value of those back-up benefits every one of us (and yes a lot of people will make serious money on there recovery but that’s the way the market works).

So, should the banks pay bonuses? Yes- to targeted individuals, and I think you will find that’s exactly what they are doing and at a vastly reduced rate to previous years.

You are also going to see a fundamental change in the bonus culture. The banks have woken up to the fact that a lot of things in the Investment Banks were being done for a ‘fast buck’ that looked good at the time but 3-years down the line was horrendous (aka sub-prime). Bonuses will still be large but they will be staggered (over years) and linked to the banks profitability that year.

I don’t expect to change anyone’s views on this, nor defend the management in the banks that caused it, but hopefully you now understand the issues a bit better and realise that the vast majority of bank employee’s are hard working individuals that had nothing to do with or control over this complete balls up but are being punished all the same.

By the way, the biggest winner of the banking bonus bonanza is HM Taxman who rakes in 25-41% of the bonus regardless.