It is very disturbing that Iceland's banks have begun clamoring for reinstatement of the bonus culture that contributed to their collapse in 2008. The reckless decisions made by the banks' geniuses of finance in the preceding years were fueled by perverse incentives that rewarded short-term gain over long-term profit. Now that the banks have been stabilized (to some degree) as a result of massive public intervention, the very individuals who have nearly destroyed the country are ready to dance again.
"The argument that a bank receiving public support needs to retain the services of these traders ... is nonsensical," wrote Jón Danielsson and Con Keating last year. "Losing money, even by bad luck, removes any justification for bonus payments. The most worrying element of this argument is that it suggests a management that believes that the future of banking looks like the recent past."
There are so many things wrong here that I hardly know where to start.
Point #1. Using public money for bonuses is morally indefensible. When the bankers were losing money their received from willing investors, paying large bonuses was one thing. Now that they are playing with our money, though, it is simply immoral for them to expect bonuses while our unemployment rate is at its highest point in modern times. Our economy is still on the brink, our population is decreasing, we are losing public services, and it is likely that there is much more contraction ahead. Every króna that these bankers receive is a króna out of the pocket of some truly deserving Icelander's pocket.
Point #2. Bonuses aren't needed to retain employees. There are a lot of unemployed bankers in Iceland (and elsewhere) today. If they don't like their current compensation, they're free to start up their own banks (with their own capital) or to find some other higher paying profession. I can imagine their job interview with a London or New York firm: "Yes, my former employer failed miserably, in part because of what I did. Please give me a chance to show that I've still got it!" The thought of these disgruntled, restless bankers contemplating like Scarlett: "Where shall I go, what shall I do?" unless they receive bonuses brings to mind Rhett Butler's response: "Frankly my dear, I don't give a damn."
Point #3. There is no justification for paying bankers more than other professionals. Are we, as a nation, well served by our most talented young people going into banking instead of, say, medicine, engineering, or education? I understand the need to have financing available for starting up new businesses and expanding successful existing business, but doesn't our future depend on more than taking money out of one pocket and putting into another, which is essentially what banking is? Don't we need a wide variety of professionals to give us a chance of competing in the long run? Why not reward successful physicians, designers, scientists?
Point #4. The bonus system was inherently corrupt. The use of equity-based compensation created incentives for the bankers to produce fraudulent financial statements or take other actions to mislead analysts and investors. Unless the new bonus system follows Goldman Sachs' lead and awards stock (rather than cash), and requires the bankers to remain on the job for lengthy periods of time (at least five years) before being able to sell their shares, we'll be right back where we were before.
If the bankers are willing to return the bonuses they received pre-collapse (which they obviously didn't earn), then, and only then, should we consider bonuses in the future.
Point #5. There is no evidence that bonuses are effective. Are the bankers telling us that they're not doing their best? Do they really need that big chunk of change to work to the best of their ability? There has never been an independent, peer-reviewed report demonstrating the long-term positive correlation between performance-related pay and organizational achievement.
Point #6. You're not as smart as you think. The bankers appear to believe that they deserve greater compensation than any other employees in the country because they are special.
I just have one question for them: If you're so damn talented, how did all this happen? Jared Bibler of the Financial Authority has pointed out that the banks' collective collapse would rank as the third largest American bankruptcy ever. You people have destroyed our nation.
As Joseph Welch famously asked Joseph McCarthy: "Have you no sense of decency, sir, at long last? Have you left no sense of decency?" ■
Political cartoonist Halldór Baldursson's take on the Icelandic banks reflects the general public sentiment: Nothing has changed; the banks are plagued with corruption and insider deals, and little relief is available for the ordinary taxpayer who is stuck with the bill for bankers' incompetence and corruption. Halldór Baldursson© www.mbl.is