James Moore: Dear Sir Mervyn, Goldman Sachs will increase revenues paid out to its staff
Outlook: Sir Mervyn King is becoming quite the radical. The Bank of England Governor used a hearing at the Treasury Select Committee yesterday to fire yet another broadside at the banks and their addiction to six- and seven-figure bonuses.
It is pushing it a bit to call him "Red Merv", but, behind the glass and steel of their luxurious headquarters, the banks' "Masters of the Universe" might agree with the description given his rhetoric. Before, that is, they get on with the business of ignoring him. The risk of reputational damage from paying bumper awards to management and other favoured staff while the rest of the country suffers – highlighted by Sir Mervyn – isn't something that worries them overly much.
Today will be a case in point. Goldman Sachs is an American bank but Sir Mervyn's words are equally applicable to is as they are to Britain's big four, Barclays, HSBC, Lloyds and Royal Bank of Scotland. Despite a rotten year, maybe the worst it has endured since its origins in New York more than a century ago, Goldman will actually increase the proportion of its revenues that are paid out to staff. The so-called compensation ratio was upped for the first three quarters of this year despite those revenues being down. That will almost certainly be the case for the final three months too.
With a normal business, this might be understandable. Employee costs are generally fixed. Many companies, it is true, have profit-share or bonus schemes, but it is quite rare for these to pay out much more than 20 per cent of an employee's salary and then only when the employer has had a very good year.
At Goldman and its peers, the situation is quite different. For those at the top of the banks, it is often the basic salary that amounts to little more than 20 per cent of the package. Bonuses are all. This year, the charmed circle of Goldman Sachs's London partners might have to make do with a tad less than the £4m or so package they pocketed in 2010. But the impact of a poor 2011 upon them will amount to little more than buying cases of Chateau Margaux rather than Petrus to have with dinner.
Bob Diamond, the Barclays chief executive, said at one of his results presentations that he wished all remuneration was variable. Defending bonuses, he argued that only those that perform are rewarded. Goldman's rising compensation ratio tells a different story. The bank has not been performing, but it does not seem to matter. Heads, bankers win; tails, they win maybe a bit less. It isn't alone in this.
Sir Mervyn has called for sweeping changes to be forced on the banking industry to bring this sort of behaviour to an end. Its political masters don't have the courage. His point is, however, one that the banks' external shareholders might like to take up. They might very well ask in whose interests these institutions are being run. It appears at Goldman that the management and partners have decided, when times get tough, they'll keep the prime cuts, leaving other shareholders with the offcuts and the scraps. It is time for those shareholders to wake up.
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