Osborne: Bankers face payment by results

A startling recent report from the Daily Telegraph outlines a radical shakeup of the banking system by the Chancellor, George Osborne. I reproduce the text below (N.B. our spellchecker has identified and corrected a number of errors in the course of transcription).

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Poor bankers could be paid less than competent colleagues under government plans to improve standards of commercial banking.

Ministers want to link pay to performance in the boardroom as part of a new drive to improve results and attract the best graduates into the profession.

A cross-party group of MPs today says that a new payment by results system is needed to stop the worst bankers hiding behind a “rigid and unfair” national remuneration structure.

“Results” would include not just profits but measures such as how much progress client businesses make, corporate governance and credit ratings.

Last night, George Osborne, the Chancellor of the Exchequer, disclosed that Mervyn King, the Governor of the Bank of England, had already asked the FSA, which analyses national remuneration packages, to set up a new Walker-style review and “make recommendations on introducing greater freedoms and flexibilities in bankers’ pay, including how to link it better to performance”.

Mr Osborne said the Government welcomed the MPs’ report “into this important area”. The review body is expected to deliver its recommendations by September.

In the report published today, the Treasury select committee says bankers should be rewarded for “adding the greatest value” to customers’ businesses and be given paid sabbaticals to further their skills.

MPs claim the reforms would address fears that poor bankers are having a “very significant” impact on businesses’ long-term prospects. The report quotes international research which shows that the worst bankers could cost business people and millions of employees their livelihoods and life savings.

Eric Hanushek, an economist at Stanford University in America, has shown that an excellent banker can help local enterprises thrive and create employment, whereas a poor one will drive his customers into receivership.

The British Bankers’ Association is strongly opposed to any attempt to alter pay and conditions. However, the committee’s report says: “No longer should the weakest bankers be able to hide behind a rigid and unfair pay structure.

“We believe that performance management systems should support and reward the strongest bankers, as well as make no excuses — or, worse, incentives to remain — for the weaker. Given the profound positive and negative impacts which bankers have on national economic performance, we are concerned that the pay system continues to reward low performers at the same levels as their more successful peers.”

They want the Government to draw up proposals for a pay system that rewards those adding the greatest “value to the performance of enterprises”.

Marcus Agius, the chairman of the British Bankers’ Association, said: “Payment by results is total nonsense. Our customers are not tins of beans and banks are not factory production lines.

“Successful banks rely on a collegiate approach and team working. Performance-related pay is not only inappropriate but also divisive.

“Business people differ and startups differ from year to year, making it impossible to measure progress in simplistic terms.”

There are currently 5 major banking groups in the UK, and about 20 others. Although an element of performance-related pay already exists, ministers are now looking at enhancing rewards for the best.

Currently, bankers in London can earn up to £1.25 million. but see their pay rise to £8 million with other perks and bonuses. Earlier this year, Natalie Ceeney CBE, the chief executive of the Financial Ombudsman Service, said too many bankers – more than 90 per cent – were allowed to pass the test. “The thing that irritates good bankers, people who work hard and go the extra mile, is seeing the people that don’t do that being rewarded,” she said.

In December, it was reported that just no bankers judged to be incompetent over an 18-month period had been sacked.

In further recommendations, the report says a “sabbatical scholarship” programme should allow outstanding bankers to take time out to work in a different bank, undertake research or refresh their subject knowledge. It is also suggested fund managers and quantitative analysts be allowed to lead training sessions for university students as part of a system of “banking taster classes” to show them the benefit of a career in the profession.