Bank bonus culture will never die

By September 14, 2009House Repossession

Why would the bonus culture die when it only rewards immediate results?

What is a bonus? Certain employees, within certain business units of a company will expect a bonus. They will receive a good solid base salary which will pay the mortgage and then some but on top of this they will expect a bonus of anywhere from 10% to around 200% of their salary. This bonus system covers the majority of workers in financial institutions. Of course there are the super bonuses, usually awarded to the old heads of the departments and the young ‘rain makers’ who bring in fresh clients or invent a new revenue stream.

Why do they receive so much money? It’s quite simple. These people work in the crux of the financial centre, where, quite literally all the money in the world siphons through. They stick one little finger out into the trickle of billions… trillions and a minute amount sticks.

When a £50 million commercial property sells in the City the fees for handling the transaction will be approximately:

Agents fees 1.00%    = £500,000

Lawyers fees 0.75%   = £375,000

Valuation fees             = £   35,000

Of course the ‘successful’ deal will be highlighted in the back pocket of the fund mangers from both sides, payments which directly affect the bottom-line of the company’s profits, its shares and therefore your pension.  Not to mention the cash made by the commercial mortgage-backed securities teams (CMBS), which have all but disintegrated in the wake of the financial collapse.

Yes these men and woman are hard working and yes in general they are quite intelligent. However, they are more intelligent for deliberately placing themselves in the right business unit within the right industry than anything else. They could have been successfully selling £50,000 units in Hull, but that industry is not swimming in billions.

The property was sold for £50 million in early 2007. Every party involved got paid. Everyone got a bonus. Now it’s probably worth around £35 million. No one hands the bonus back, paid for by your pension shares depreciating. This is the flaw, there is no long term on the decisions made by the parties involved and not one single party within the cycle has a reason to stop the sale. There are no financial police in deals like this.

The bonus culture will not stop until companies and more importantly the heads of departments and CEOS’s are accountable for losses as well as profits made in the long term.