Prisoners of the market

All those hard pressed chief executives and bankers worried about the flack they have been receiving on pay and bonuses can sleep more easily in their beds this week after Stephen Hester, chief executive of the Royal Bank of Scotland gave them what must be the ultimate in justifications. There was nothing highly paid bankers could do about their pay levels, he told an House of Commons select committee, since their employers are "prisoners of the market".

Never again do wealthy executives have to feel cornered at dinner parties. All they need do from now on is throw up their hands and declare: "I'm a prisoner of the market." Case closed, move on.

What about the pay consultants?

Much has been written these past few days on the size of bank bonuses. The big complaint, understandably, is that in the loss-making banks these can be perceived as rewards for failure.

Most of the criticism on bonus policy is being directed at the banks. These policies, however, are drawn up not by the banks but by their pay consultants who have been keeping their heads down in the past few weeks.

I would welcome some justification for some of these policies from those who advise their corporate clients on incentive pay. But I don't expect to see it.

The relationship between work and pay is complex. Pay does matter but it matters most at the point of negotiation and when there is a perception of injustice. Pay is used as a lure to recruit people but once they are on board it is unlikely to become a source of unrest unless they perceive they are being unfairly treated (something I explored in this column).

In the most senior ranks companies have lived with the reality that sometimes they will be paying for failure for too long.

I have yet to see a convincing argument to support the proliferation of the bonus culture in banks. As for guaranteeing bonuses, that is a nonsense as the only justification for the bonus is that it can be regarded as variable pay, offering some protection for the paying institution if markets take a tumble.

Of course, if employees have done all that is expected of them and more - which is the case for thousands of hard working people in the Royal Bank of Scotland and HBOS - it is natural that many will feel aggrieved to be losing their bonuses as a result of poor decisions at the top of the organisation.

On the other hand they may reflect that their projected bonuses derived from unrealistically high expectations over many years when times appeared good (but in fact, better than reality in a bubble economy). Those that retain their jobs must know they need to take the rough with the smooth.

A bonus must be just that - a sum of money that is not guaranteed and which should not be taken in to account in financial planning. The danger is that some people will have included expected bonuses when stretching their finances to meet a demanding mortgage, for example. They will suffer. But perhaps they should. Overspending on "hope money" is a harsh lesson for anyone, but one that should ensure greater prudence in future. Everyone must learn to live well within their means. That way they should live well.

A bank too far

I can relate to Fred Goodwin, former chief executive of the Royal Bank of Scotland, in more ways than one. We both had relatively poor backgrounds, both went to state grammar school and both worked on the liquidation of the Bank of Credit and Commerce International (BCCI), he as a Touche Ross accountant and I, as a financial reporter.

If only the similarities would end there, but a couple of others remain a source of pain. The first is that I regarded RBS as one of the best run businesses anywhere, not just in the UK, but anywhere.

I was so impressed with its operations - particularly in the way it handled employees - that I persuaded my wife (what's mine is 'ers and vice versa in our household) that RBS shares would make a good investment. I'm not a gambler. Banks are rock solid, I argued, and this is as solid as they come. They were around £12 a share at the time. Today they are trading at about 12p a share.

Goodwin was the Napoleon Bonaparte of banking, a financial general whose troops - or investors - would follow him anywhere. Even when the bank was suffering and instigated a rights issue, we responded in our thousands, like those who rallied to the Marseillaise at Waterloo.

We remembered the glory that was Nat West - Goodwin's Austerlitz. Few takeovers could have been administered with such aplomb so that Nat West's operations were absorbed almost without a hitch. But Goodwin was always eyeing a greater empire.

His own Waterloo was ABN Amro, a bank that he feared would be plucked from his grasp by a Barclay's Bank-led consortium. This was his undoing. Not all of his board was united over the takeover; some thought RBS was paying too much. But Goodwin by now was the general who saw the business as something of a battle for supremacy among banks. It was never that and ABN Amro was a bank too far.

How many times have we seen great enterprises wrecked on the back of a singular ambition? The thing is that there are still great people at RBS. Many of the old guard might have gone, but enough remain to remember the good days. Can they resurrect the best of the bank for taxpayers? I hope so, I really do, but they won't be doing it with any more of our money, other than our taxes. Even fools can learn.