Economy distorted by multimillion pound bonuses

Everyone loves a good bonus. None more so than the thousands of financiers across the globe who enjoyed ‘stonking’ payments in 2006.

In the vanguard was Lloyd Blankfein, the lucky chairman and chief executive of Goldman Sachs, the world’s leading investment bank, who coined a staggering $53.4 million payout on top of the rather more modest $38 million he gathered in 2005. Indeed, the average bonus package for Goldman’s 26,500 staff now stands at $622,000. Such largesse has not gone unnoticed by unions campaigning on behalf of those who work on low pay to keep offices clean and tidy for these new ‘masters of the universe’. Thus, last November, Goldman’s London HQ on Fleet Street became the focus of a protest led by the T&G trade union, which presented the bank its ‘golden vacuum’ award – for ‘sucking cleaners dry’.

2007 will see bonuses in Britain topping £20 billion, a colossal sum worth three times Britain’s annual aid budget. On the back of a 40 per cent hike in their earnings in 2006, the country’s chief executives are set to enjoy another bumper year, with their pay packets rising to over 100 times average earnings. Admittedly, this is nothing compared to the 411-to-1 ratio that now exists in the USA, but it marks a remarkable widening of the earnings gulf since the beginning of the decade, when the gap was ‘just’ 39 times.

The most ironic – if not tragic – aspect of this latest surge in inequality is that it has occurred during one of the most active periods for corporate governance in decades, with increasing shareholder focus on unacceptable levels of executive pay. But while shareholders have won a number of battles and succeeded in curbing some of the most egregious plans for executive self-enrichment, the governance movement risks losing the wider earnings war.

The paradox is profound. Increasingly, the workers ‘own’ capitalism through a combination of pension plans and mutual fund investments. Yet, just as the long-held dream of social ownership was being realised, a concerted counter-attack from corporate and financial elites has delivered one of the most profound transfers of wealth in recent history. Two groups have benefited from this redistribution effect: ‘big finance’ on the one hand and corporate executives on the other. The past 30 years has witnessed a growing ‘financialisation’ of the economy, with finance sector profits growing as a proportion of the total in the USA from 14 to 39 per cent. As well as securing a larger slice of the economic surplus, investment bankers in particular have proved particularly adept at rewarding themselves as individuals. City watcher Philip Augar has calculated that between 1980 and 2000, more than $120 billion was diverted from shareholders and customers to well-placed staff in the US securities industry alone.

Executives as a whole have benefited from the triumph of shareholder value as the new lodestar for corporate management. With an exclusive focus on boosting the share price, clever compensation consultants have devised ever-more complex (and lucrative) packages that supposedly align executive pay with investor interests. The result has been an upward spiral in pay, pensions, options and other perks.

Dubious as it may seem, much of this is entirely legal – justified on the pious principle that great performance deserves great pay. Yet, in spite of the furore that followed the Enron debacle, some schemes still seem to step over the line of illegality. The shocker of 2006 was the exposure of the great option scandal at more than 120 US firms. In essence, executives and staff were granted share options at preferential prices, essentially ‘picking the lottery numbers after they have been announced on the evening news,’ in the words of one of the many investor lawsuits now underway. In all, damages to shareholders – including the pension plans of low-income employees – could total tens of billions of dollars.

Beyond the social pain caused by this deliberate engineering of inequality, there is increasing evidence that today’s incentive culture is bad economics, worse psychology and pitiful ethics. Bonuses are already creating local inflationary bubbles in housing and land, as well as distorting national wage figures, potentially prompting unjustified hikes in interest rates that could damage the wider economy. Behavioural financier James Montier has catalogued the perverse impacts of incentives, which don’t always have the effect on motivation and performance that compensation consultants would have us believe.

Just as this recent divergence in fortune has been entirely man-made, so the solutions equally lie within the powers of every pension fund in the land: set clear targets for the multiples of executive pay to average earnings and vote accordingly. The US organic supermarket chain Whole Foods Markets – which owns Fresh & Wild in Britain – has set the benchmark for fair pay, with employees’ salaries strictly limited to 14 times the group average. For cutting executive excess is just as important for sustainability as cutting carbon emissions.

FairPensions, the campaign for responsible investment, is calling for pension schemes to be active investors: to use their shareholder power to challenge poor environmental and social behaviour, and to be transparent on such issues. For more information, see

This article first appeared in the Ecologist February 2007

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