This was the evasive answer Indiana Jones, a leading archaeologist played by Harrison Ford and his companion Dr. Brody received at the end of the blockbuster film “Raiders of the Lost Ark,” when they inquired about the Ark of the Covenant.
“Who?” Jones asked, not satisfied with the reply.
“Top men.” The slow emphatic reply from an unyielding US government official.
The film then cuts to a scene where the Ark is being nailed into a wooden crate and then wheeled through an enormous secret US government hanger to be hid away. Of course there were no top men.
There is a certain analogy with the controversial issue of bank bonuses. The argument goes if we want to turn around a failing bank like RBS, owned by the UK government then we need the best bankers and if don’t pay them large bonuses they’ll go elsewhere. An analogy is sometimes made with the Premier League, if you want success in football you have pay top dollar for the best players. I don’t buy this argument when it comes to the banks. After all wasn’t it the top bankers who caused the financial crash in 2007 and 2008 that required government bail outs and led to the worst global recession since the 1930s?
The bank bonus culture has been with us for many years, banks have been tripping over themselves to attract the best talent and pay their top people well so they did not leave for the competition. All well and good if it translates to bottom line profits, profits growth and shareholder value – attractive dividends and share price appreciation. Too often shareholders in banks have had a rotten deal with miserable returns; and what we observed with RBS this week typifies the cock eyed thinking. The bank made a loss of more £8 billion in 2013 and yet wanted to pay £588 million in bonuses. The top people have not delivered, so why should they be given bonuses? I also think it odd that bonuses are paid out of the balance sheet not profits and do not believe there is no young up and coming talent within a bank to replace the so called top bankers running off to the opposition.
Similarly it was reported in February that Barclays Bank, which has not needed taxpayer support, announced a £2.38 billion bonus pot for 2013 up 10% from 2012. Dividends by comparison were just £859 million. The context for this was that profits fell from £7.6 billion in 2012 to £5.17 billion in 2013 (Source FT http://www.ft.com/cms/s/0/373c4d50-92ea-11e3-b07c-00144feab7de.html#slide0 ). According to the FT dividends were flat at 6.5 p per share.
I appreciate the issue of bankers’ bonuses is more complex than my analysis with one off profit and loss contributors, deferred pay-outs, bonuses paid in shares rather than cash but shareholders do wish to see their interests more aligned with banker remuneration. However what is interesting is to see how the fund management industry does it in comparison to investment banking. And I hear some of you saying, doesn’t my IFA, Mike Grant keep banging on about top fund managers and how talented they are to justify his investment recommendations? Whilst I am not party to the remuneration arrangements of star fund managers I am sure they are paid very well. However there is a much clearer link between management company remuneration and investor returns. This is due to the percentage management charge, typically 0.75% to 1% p.a. of the fund value. If a fund manager delivers a market beating return and grows the unit price from £1 to £1.20, investors gain 20% and the management fee will increase by 20% as well. The individual fund manager’s individual bonus from hitting or exceeding a target will invariably come from the annual management fee. It is worth pointing out that very few OEICs (open ended investment companies) or unit trusts have a performance bonus on top of the annual management charge paid by investors.
In conclusion I am supportive of top people in the investment fund industry if not the banking industry. They gain when investors do and lose money when markets fall. It seems a fair meritocracy to me.
This blog is intended as general stock market commentary only. You should seek individual advice before making investment decisions.