Comment: "All in this together"? Banking bonuses in the UK and Australia

Plenty of financial concerns have struck the UK and Australia in parallel in recent months, and not all directly as a cause of the global slowdown either.

There’s been the odd banking scandal; there’s been the issue of fee-driven banking products; and there’s the issue of payday loans, which is also gripping both countries.

Now the focus turns to individuals and, more specifically, the issue of bonuses.

Public Banks & Bonuses: RBS

The UK’s latest bonus storm has centred on the taxpayer-owned RBS, among the first to report their remuneration packages for the year.

In the face of considerable political pressure, RBS chief executive Stephen Hester turned down his near £1 million bonus share option this week. Presumably, after Labour vowed to force a Commons vote on the issue, the public-supported bank clearly thought better of fighting a publicised case with Parliament for bonuses that are deemed by many to be grossly excessive.

Ex-chief executive Fred Goodwin has also been de-knighted this week, formally recognising his hand in the swelling of RBS’s balance sheet to an unsustainable point of collapse while negotiating his own pension settlement of £12 million. RBS required £45.5 billion in rescue funds, which were supplied largely by taxpayers and emergency loans issued by the Bank of England. As the BBC’s Robert Peston aptly puts it, “his were the sins of commission”.

Mr. Hester’s successes at RBS have largely involved descaling and deleveraging. The balance sheet has been reduced by £600 billion since 2008, including the recent sale of its aircraft leasing business to Japanese bank Sumitomo for £4.75 billion.

The bank’s core has strengthened as the ratio between assets and loss-absorbing capital has improved. It has also cut its holdings of sovereign debt in the weakest Eurozone economies by over 80% throughout 2011.

The bank has even returned to profit following extensive losses of £24 billion in 2008 and £3.6 billion in 2009. The £2 billion reported gross profit for the third quarter of 2011 marks a significant recovery from the £1.6 billion loss in the same period of 2010.

The big problem for critics is the share price, which has plummeted under Hester's tenure. Consequently, the public £45.5 billion invested in RBS is now worth under £20 billion.

Perhaps it is, of course, that a vastly overinflated value of RBS stocks has been muted down with the balance sheet reduction.

The bank has cut over 10,000 jobs since its public rescue, many in the investment arm of the business, but a return to profitability is a positive sign for the taxpayer.

The Ethics of Australian Banks

Public opinion on bonuses and job-losses is understandably raw, but it may be worth suspending judgement for a minute until this is compared with Australian banks, which are floating precariously close to where the UK once foolishly lingered.

Despite each of the ‘big four’ banks – Commonwealth, ANZ, NAB, and Westpac – posting record profit levels for 2011 of between $5-7 billion, several job cutting announcements have infuriated unions who are accusing banks of pandering to fat-cat shareholders.

"The banks feel they are under pressure to produce record profits year after year and as soon as they are under a little bit of pressure their answer is to cut thousands of Australian jobs," said Leon Carter of the Finance Sector Union, responding to news that ANZ had moved to sever 130 jobs in the first stage of a larger redundancy plan.

ANZ’s profits increased by 19% to $5.36 billion in 2011, which saw CEO Michael Smith take home roughly $5 million.

ANZ’s board, moreover, has added to the antagonism by heavily incentivising an additional bonus for Smith of $3 million in stock if he meets targets on share price growth and dividends.

Directors have unabashedly said that this incentive will ''motivate'' their chief executive and more closely link his interests with those of shareholders. This dangling of the carrot is a hubristic indication that profit retention remains an aggressive top priority.

Avarice, the Spur of Industry

Criticise RBS as we may in the UK, the bank's recovery from steep losses towards profitability is in sight, which has to be the central objective of the beleaguered bank.

Though the operational profit position of Australian banks could barely be more different in the face of global downturn, it’s truly debatable whether that success will lend itself any more to the public interest.

Is avarice the spur of industry, then, or the spur of revolt against excessive rewards?

Keith McDonald
Which4U Editor