A month or so ago I wrote about city bonuses, and I didn’t expect to revisit the topic for some time.

But keen as so many of us might be on a free capitalist economy and the infrastructure it creates that allows us to build our own personal wealth, whether through personal investments or retirement planning, there comes a time when we have to ask ourselves a fundamental question:

Can we really allow reward without risk?

News of the collapse of Lehman Brothers has been accompanied by confirmation that £1.4 billion will be paid out between as few as 28 individuals in bonuses, to ensure they do not jump ship.

Without wishing to comment on individual circumstances, one thing is almost certain; those who receive these massive pay-offs are likely to be those responsible – at least in part – for the problem in the first place. Whether or not Lehman Brothers were involved directly in the sub-prime mortgage market is questionable; that they were involved in the worldwide market in securities mortgages (that is, bundles of mortgages sold by direct lenders to other investors) is not.

So the senior executives who were ultimately partly responsible for the development of the ‘credit crunch’ – if not by countenancing the investments, then certainly for not having overseen what bank employees were doing – are to be rewarded, while other employees in Europe and the Middle East are likely to get nothing beyond this month’s salary.

Risk and reward
This calls into question the basic premise that there is ‘no risk without reward’; it appears that for some, there is ‘reward without risk’. The senior executives involved might argue that they risk their jobs and are therefore entitled to massive salaries and bonuses in recompense.

But it is not their personal fortunes that they put at risk (with the exception of some hedge fund managers, who own part of the funds); they are investing other people’s life savings and pensions. If the gamble goes wrong, they may lose part of their bonus; they may even lose their jobs. But they are unlikely to lose the fortunes they have accumulated over many years of risking other people’s money in the pursuit of massive rewards.

What can be done?
Several voices – on both sides of the political divide – have raised questions over the extent to which massive bonuses are justified. The argument is usually put that without the rewards, high calibre people will not take the risks. Again, we ask, what risks?

One option is to ban or tax ‘excessive’ bonuses. However, this carries with it the risk that the companies and individuals involved will simply move out of London. Conversely, if regulators within all major market were to act together (which they are most unlikely to do), migration (often called regulatory arbitrage) will be negated.

More realistically, perhaps, banks should be forced to tie bonuses to longer-term results, so that there is no reward for taking short-term risks that only benefit individual bankers, not shareholders, investors, or the economy at large.

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