£963,000 question: do bonuses really make for better bankers?

THE BONUS of £963,000 in shares awarded to Stephen Hester (above), boss of the state-backed Royal Bank of Scotland, has met with widespread criticism from politicians and commentators. But should we be worrying about one man's pay packet - or dealing with what's wrong with the whole system of banker's pay and bonuses?

The government had little choice

The government didn't have a lot choice about Hester's bonus, says Robert Peston for BBC News. Hester and much of the board would have quit if the payment had been vetoed by the government as the majority shareholder. A mass resignation of RBS directors would have created "all sorts of bigger problems".  

Hester should turn it down

Lib Dem Foreign Office minister Jeremy Browne told BBC TV's Question Time: "There's a question of honour. Even if there's a contractual opportunity for him to have a bonus it doesn't mean he has to accept it."

Hester was paid more in three days than a soldier serving in Afghanistan received in a year, said Browne. "He should reflect on that." Hester is effectively a public servant and needs to think like a public servant "who has a duty to his country, not just his own wealth". No one's forcing him to take the bonus. "He could struggle on with £1.2m."

The problem is that Hester should have been offered a public servant's salary from the outset, "plus a gong at the end if he's done a good job", says Martin Vander Weyer in The Spectator. In general, provocatively high boardroom pay will notch downwards "only through a combination of market forces and enlightened, self-denying examples". In the meantime, Hester should be "locked in a windowless room until he agrees to take one for the team".

Let's deny the bonus as a test

Since we own the RBS, it could be the testing ground "for whether lower banker pay really impacts on performance or not", says Simon English in The Independent. It would be a bit inconvenient if Hester were to quit, "but at least we'd get to see whether the next man – a cheaper operator presumably – is actually any worse than the supposed star".

Forget Hester, we should worry about the system

The outrage is predictable, but what purpose does it really serve, blogs Samira Shackle for the New Statesman. There's an understandable sense of injustice that bankers continue to receive ludicrous sums of money while jobs are being lost across the country. But the RBS boss works in a system which makes this sort of compensation expected, even necessary.
 
This is what needs examining, says Shackle - "not the details of the payment received by one man, in one year." We should be more worried "that no one appears willing to undertake the fundamental restructuring of the financial sector that would ensure fairness and prevent another financial crash".
 
Bonuses don't work anyway

Shareholders should consider scrapping fancy pay packages and bonuses altogether, says Richard Lambert in The Financial Times. The empirical evidence suggests they don't improve performance and may prompt managers to waste energy manipulating the performance criteria.
 
Research shows that "starry performance" is often just the result of good luck, says Lambert. Just think of Fred Goodwin - hero when the RBS was taking over the world, villain when it collapsed. His fundamental qualities didn't change, his luck just ran out.
 
Non-material rewards such as awards and recognition are a better way of motivating executives, adds Lambert. And let's not forget, "no one is irreplaceable". ·