We’re in Dire Straits – Money for Nothing

So today we learn that political pressure has forced RBS boss, Stephen Hester, in the UK to reject his near £1M bonus.  A good thing or not?

My view is very simple – bonuses should be earned and if they are they are a good thing.

Bonuses are firstly an incentive for special performance, above the norm, and also to attract and retain talent that will perform above the norm for a business.  My aim would be to have every person in a business on a bonus – indeed that is what I achieved when I had my first business, and everyone profited as a result when it was sold.

The key though to a bonus is that it must be linked to performance in a demonstrable way.  It must also reflect value for a business.  By this I mean that the business must have had value before it pays out a bonus – either profit already made (not potential for the future) or value to come in which case share options for the future is a fair way of ensuring that a bonus arrives only if value is truly gained.

What is wrong with bankers bonuses is not the share options that Hester was to get for turning around RBS (something all us UK taxpayers who now own RBS desperately want him to succeed in), which would only provide value in a few years if he is successful, but the bonuses bankers got in the boom times in cash when the banks had yet to earn the cash for the what the bankers were getting bonused on.  I could not believe it when I heard that bankers were given bonuses in year zero for a future profit stream over five years, which had not yet been realised and was at risk, and that the banks had to borrow against the projected profit stream to pay the bonuses – that is true madness (albeit another great band!).

As an interesting aside I was given what seemed to me at the time very generous Lockheed Martin share options after I sold to them in 2005 and worked as a VP for 2006 and 2007.  I lost these share options when I left in 2007 (and it was right that I did so).  When they were struck, i.e. given to me as bonus options exercisable in 3 years, the value was some $85.  They did increase to $106 at one point, but now sit at $82 as of today – so had I stayed I wouldn’t have received anything for them, but then Lockheed hasn’t progressed in terms of shareholder value so why should I?

There is no such thing as a free lunch and neither should we get money for nothing.  However, a well constructed bonus arrangement is a good thing and we shouldn’t be afraid to say so, even in this politically charged environment.

About Julian Ranger

Please see http://www.jranger.com/

Posted on January 30, 2012, in Entrepreneurship, Start-Ups and tagged , , , . Bookmark the permalink. Leave a comment.

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