RBS pays billions while Commerzbank bankers get nothing

By Edward Harrison of Credit Writedowns

Over the past few days, a number of major European banks have announced earnings results.  Two of the most dismal results were registered at the British company Royal Bank of Scotland (RBS) and at Germany’s Commerzbank. However, the similarity ends there because, while Commerzbank investment bankers received no bonus, the bankers at government-controlled RBS received billions of dollars in bonuses. In my view, this differences highlight a cultural divide on compensation between financial services-dominated countries like the U.S. and the U.K. and industry-driven economies like Germany.

Large losses and zero bonuses at Commerzbank

Let’s start with Commerzbank. Yesterday, in yesterday’s links I posted a Bloomberg story “Commerzbank Doesn’t Pay Bonuses to Investment Bankers for 2009” which outlines the recent bonus and earnings numbers:

Commerzbank AG, Germany’s second- largest bank, isn’t paying investment bankers bonuses for 2009 after the company posted a 4.5 billion-euro ($6.1 billion) loss.

“We de facto didn’t pay variable compensation components in investment banking in 2009,” Chief Executive Officer Martin Blessing said at a press conference in Frankfurt today. Michael Reuther, Commerzbank’s head of investment banking, said the U.K. bonus tax will therefore have no impact on Commerzbank.

So Commerzbank’s stance is that, having lost billions during the financial crisis, it cannot pay bonuses. This is the second year in a row that Commerzbank has said they weren’t paying bonuses. See my post “No one gets a bonus at Commerzbank and no dividend either” from last February.

Large losses but large bonuses at RBS

At RBS, the results were similarly catastrophic but RBS is paying £1.3 million (Guardian) or £1.7 billion (Times of London) depending on which account you read.

Jill Treanor of the Guardian writes:

Royal Bank of Scotland faced renewed criticism over its decision to hand out £1.3bn of bonuses to its investment bankers this morning as the state-controlled bank reported a loss of £3.6bn.

Stephen Hester, the chief executive who has waived his £1.6m bonus, warned that "2010 will be a year of hard slog" as he battles to restore the bank, which is supported by up to £54bn of taxpayers’ money, to profitability.

The losses, an improvement on the record £24bn lost in 2008, were caused by impairment charges on loans which have turned sour to the tune of £13.8bn, although Hester said it now appeared that these may have peaked.

The underlying core business posted operating profits of £8.3bn, up 89% on 2008, but £5.7bn of these came from the investment banking arm, known as global banking and markets.

This explained the need to hand out bonuses to the staff in the investment bank, although chairman Sir Philip Hampton insisted he shared "the public’s concerns" about the need for the payouts.

Shadow chancellor George Osborne waded in to the row by saying "people will find it very difficult to understand" how RBS could pay out bonuses in the current circumstances.

"We have just got to look at the whole banking sector and try to bring this pay down. It has got to ridiculous levels," he told BBC Breakfast. Osborne, though, gave no clues how a Conservative government would have tackled the problem.

He told BBC Radio 4’s Today programme: "I do think the level of payment in the banking sector has got completely out of kilter with the rest of society. It is totally disproportionate to what doctors are paid, people working in industry are paid, teachers are paid and the like.

"We need to bring down pay across the sector – not just in one bank, across the sector – and things like a bank tax, internationally agreed, might help do that."

Treanor explains the crux of RBS’ bonus payments as coming from the divergence between catastrophic full-year results at RBS and a glorious operating result in global banking and markets. But, there is a different, more pressing rationale offered by RBS chief Stephen Hester, namely that staff are leaving in droves because of poor pay.

Philip Aldrick of the Telegraph writes:

Speaking after RBS unveiled a £3.6bn loss last year , chief executive Stephen Hester claimed a thousand top bankers quit in 2009 for better pay elsewhere, adding: "This year will look a lot like the last… The people who left us last year would have increased our profits by up to £1bn… [This year] we will lose uncomfortable amounts of staff."

The Telegraph goes on to reveal that more than 100 people earned bonuses in excess of £1 million at RBS – most of whom I suspect are on the investment banking side of the business where the operating results were fantastic.

The problem with large bonuses

Here’s the problem. While RBS’ global banking and markets business may appear to be firing on all cylinders right now, the fact is it is those same groups who caused the catastrophic losses and government takeover in the first place. Compensation at RBS rewards bankers for immediate results when, in fact, their investment decisions have longer-term consequences on the bottom line at RBS.

This is what we have witnessed during the financial crisis – bets that once looked brilliant and earned the too big to fail employee punter a shed load of cash went decidedly pear-shaped later, exposing RBS and UK taxpayers to tens of billions in losses. To my mind, it is wholly unjustifiable to pay large bonuses unless these are specifically linked to the longer-term outcomes of the specific investment decisions upon which those bonuses are based. You have to either do this, base bonuses on long-term company results, or institute some clawback mechanism.

Moreover, RBS, Commerzbank and other too-big-to-fail institutions like them which have benefitted from government largesse NEED more capital. Every dollar awarded in compensation is a dollar that could be used to bolster the capital base in order to promote the lending that is clearly not taking place in Europe right now.

If I were the American President Barack Obama, I might say something like:

I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.

Yes, some people most certainly deserve high compensation. But I do want there to be some semblance of reality in compensation structures. Hundreds of employees at companies like RBS that are wards of the state should not be receiving millions in bonuses for the simple fact that their jobs couldn’t exist had it not been for government intervention. The fact that the government had to bail the company out is de facto evidence that not all the performances to which these bonuses are linked justify millions in payout.

This should be patently obvious.

Instead, the executives pretend this isn’t true, relying on the spurious argument that they will lose staff unless they pay them millions. Have you done such an ineffective job of creating company loyalty that you would lose your best corporate citizens because they didn’t receive a large bonus in one particular year? A loyal employee would stick around for the long-term if you could effectively convince her that this was a one-off. Is salary so important to people that they would be willing to jump ship just for a bump-up in bonus?  Yes, of course it is.

But, that’s the price you pay for the reckless lending and dodgy investments which brought the global economy to its knees.

Culture plays a large role

The thing is the banking sector in the UK is enormous. I would argue that countries with outsized banking sectors like the UK, Ireland and the U.S. put undue emphasis on the importance of this sector. As I pointed out in my post “Inside the mind of an investment banker: Greece, Goldman and derivatives,” compensation is the most important yardstick now being used to validate achievement, success and self-worth in the industry. So naturally, the tendency is to make all manner of justifications for large bonuses.

There is something cultural here at work as well.  Let me give you an example from a high profile deal of yesteryear.

Remember, the huge brouhaha over compensation in the tech bubble-era takeover of Germany’s Mannesmann by Britain’s Vodafone (Airtouch)? Back then, the mobile phone market was a huge growth market, with the market doubling between 1997 and 1999 alone. As a result, Vodafone was a darling of technology investors. Buoyed by a bubble in valuation, the company went in search of acquisition targets abroad, quickly coming across Mannesmann, a traditional German industrial company that lucked into the goldmine that was mobile telephony.

Vodafone was rebuffed by Mannesmann management on the grounds that the deal made no strategic sense. Vodafone went hostile and launched a bid anyway. The German labour union IG Metall metal workers union immediately rejected the deal (remember, Vodafone was not a telecom company, but an industrial company with a large Telecom unit). The American labour unions actually supported the deal, highlighting the difference in cultures.

Eventually in 2000, the deal went through. But, the critical feature of the deal in the German press was the enormous bonuses awarded to Mannesmann management – 111.5 million deutsche marks ($77 million). Mannesmann group chair Klaus Esser alone pocketed more than 60 million deutsche marks (about $40 million).

Germans were outraged. The scale of the pay packages was unprecedented. And this was pay which, although technically for past performance at Mannesmann, was being awarded for people who weren’t likely to be a part of the new larger Vodafone enterprise for long. The feeling was that management had rebuffed the initial offer because they did not want to lose their jobs, but took Vodafone CEO Chris Ghent’s sweetened offer because they were effectively being bribed. So, they were sued. Although the men were eventually acquitted, the case has had lasting impact in Germany.

The defendants had argued that such large payments are common practice in other countries such as the United States and that sanctioning the executives would discourage any bold decision-making in German companies in future.

All Acquitted in Mannesmann Trial, Deutsche Welle, 2004

That’s a long winded way of saying the Germans look askance at Anglo-Saxon pay practices because the Germans are much more sceptical of the large gulf in wealth and opportunity the practices create.

As an aside, one reason the mobile telephony market was so attractive had to do with low interest rates. Telecom companies needed huge investment in fixed capital, especially for the nascent mobile networks. When interest rates are low, it has the effect of shifting investment capital toward longer-term capital intensive businesses (think Enron, WorldCom or Qwest) because the low rates increase the net present value of distant cash flows. When interest rates normalized, the bubble in telecom stocks burst and the malinvestment became evident. Vodafone was forced to take the then-largest writedown in corporate history for the Mannesmann acquisition.

In the end, it isn’t clear to me the money that Mannesmann management received at the beginning of the last decade was any more justified than the money RBS bankers are getting now. Unless pay practices in banking are reformed, I suspect seriously onerous regulation on compensation is coming.


Vodafone’s hostile takeover bid for Mannesmann highlights debate on the German capitalist model – European Industrial Relations Observatory Online

Germany charges six in Vodafone takeover case – Independent

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. tyaresun

    You nailed it. This post highlights the problems we face more that any other posts. The financial sector has to shrink very significantly. The income disparity between the top and the bottom of the totem pole has to decrease significantly. If not, the totem pole will keel over.

  2. chilliwill

    Commerzbank’s marketing works very well, they just renamed the bonus stabilisation package….. and Mr Blessing made sure his wife at another investment bank received all the asset sales business from Commerzbank and a nice 2 digit million dollar errrrr reward… hypocrits

  3. i on the ball patriot

    Ed says — “In my view, this differences highlight a cultural divide on compensation between financial services-dominated countries like the U.S. and the U.K. and industry-driven economies like Germany.”

    In my view the differences highlight a cultural divide between pernicious, back breaking, control oriented greed (US and UK), and plain old fashioned vanilla greed, (Germany) that is presently getting its clocks cleaned and being sucked into the pernicious greed realm.

    But the real cultural divide is between have and have not. The entire global banking industry stands as a parasitic gang raping drag on humanity that should be ‘de-privatized’ and nationalized to a utility form with zero interest loans made directly to citizens. Screw these gangster banks all!

    In tandem with that, ordinary elected citizens should be placed on corporate boards with numbers placed proportional to dollar volume of the corporations. It is time also to kick this global corporate structure, that selfishly and carelessly misdirects the use of global resources, square in the ass.

    Deception is the strongest political force on the planet.

    1. Edward Harrison Post author

      This article gets at what you’re saying:


      “Plato first argued the case for proportionality – and it is telling that justice in so many cultures is signified by a pair of scales. Retribution should be proportional to the crime. But so should reward be proportional to our extra effort. It is a fundamental part of human beings’ hard-wiring. The scales symbolically declare that justice is getting our due and proportional deserts.”

      1. i on the ball patriot

        Yes Ed, the article does get at what I am saying — clearly stating that fairness is lacking and needed — but, true to corporate media form (the Guardian is in reality the guardian of the rich man’s wallet), it fails on the remedial end. Said another way; its long on ‘I feel your pain’ but short on remedy.

        I would love to see some discussion from the corporate owned and controlled media of just what fairness really is in terms of dollars and cents, for instance;

        • What should the maximum wage really be?

        • Just how much total asset wealth, or ‘property’, should be fairly ‘owned’ and controlled by one human being?

        • When corporations have budgets that are larger than nation states, and direct resource consumption in a net negative effect to society, how do citizens get control of them?

        • When governments have been corruptly purchased by the wealthy ruling elite banking cartel and used to scam the public into illegal and immoral debt traps, so as to enslave them, and devalue and strip them of their common assets, how does the public best go about refuting that illegal and immoral debt and clawing back the societal losses caused by them?

        • How do we eliminate the relatively very few pharaoh pigs at the top that have claimed that they are more equal than others and corrupted the system?

        • How do we get past the idiocy and futility of being continually told to direct our remedial energies to the same, corrupt, non responsive to the will of the people, governments that have caused our problems in the first place?

        Deception is the strongest political force on the planet.

  4. kezza

    While RBS’ global banking and markets business may appear to be firing on all cylinders right now, the fact is it is those same groups who caused the catastrophic losses and government takeover in the first place.

    I’m not sure that is the whole truth, given that it a substantial part of the losses before rights issue and governemnt take over was from taking over what ABN AMRO had, although it is true that the traders at RHS had involved in the sales of sub-prime securities under Fred the stred.

  5. owning_is_like_renting

    Actually, several people were found guilty of what is generally referred to in German with the term ‘Untreue’ (self-enrichment is a secondary aspect, by the way – the term more refers to betrayal of trust or breach of responsibility to the organization one belongs to) – including a certain Herr Ackermann, still chairman of Deutsche Bank.

    And they weren’t exactly found innocent – they were found culpable, and paid fines (Ackermann 3.2 and Esser 1.5 million Euros), but avoided being convicted in terms of what would be called ‘vorbestraft’ – which would permanently disqualify Ackermann from being able to lead a German financial institution. Further, after he was able to buy his ‘innocence,’ the Greens particularly pointed out how money made the difference in ‘class justice,’ as a normal citizen simply couldn’t buy there way out of such a situation. (German text – http://de.wikipedia.org/wiki/Mannesmann-Prozess )

    But regardless of the various technicalities, Ackermann and Esser (among others) were concretely penalized for the sort of behavior lionized in the pages of something like the WSJ. And Ackermann, at least so far, has been remarkably careful to avoid falling afoul of any government program which would threaten his position at the helm of the Deutsche Bank – because if anyone ever finds any official proof of malfeasance on his part, he would likely face real jail time. He has already used the only stay out of jail card for (almost) free he is likely to ever get while playing his style of monopoly.

  6. DellaTerious

    You asked: “Have you done such an ineffective job of creating company loyalty…” Company loyalty? Did you miss the paradigm shift? Did you not read the question Jack Welsh asked his 30-year GE employee? The view of management, especially financial services management, is that you’re a sluggard and a lummox if you stay at one company. If you don’t show enough interest in yourself to get off your duffer and jump ship at the first opportunity, you’re nothing more than a parasite.

    That means that now, anyone letting company loyalty stop them is a buffoon, the company will lay you off, try to get out of any pension promises they made you and cut off any health/dental benefits post-retirement that were proffered.

    Human resources are just like any other natural resource: squeeze out what you can, then onto the slag heap.

  7. anarkst

    Legal theft, nothing more, nothing less. But, then again, this entire system is pretty much the same. It’s just obvious when it’s so blatant.

  8. scraping_by

    Culture? Not so much. Technically, what we’ve got here is called a deviant subculture.

    It’s a numerically small group that is defined away from the larger culture in some obvious or objective way. The objective fact is that they’re absurdly rich while the rest of us are, at best, comfortable. They also have some wierd customs about status and dress. See Lewis.

    Their attitudes are foreign to the majority of their fellow citizens. The claim that they actually deserve these incredible amounts of compensation jars on enough people it’s an obvious deviance. They have a few supporters outside their group, a few of whom are not being paid to agree, but for the most part they’re the only ones who think they’re right. That’s a big sign of a deviant subgroup.

    In the live-and-let-live tradition that’s the best of America, we could just shake our heads at ugly blazers and absurd club rooms. But they are a demonstrable danger to the rest of us. Their culture isn’t our culture.

    1. Eagle

      This argument didn’t work well enough to ostracize the gays, I doubt it’ll work on a vastly wealthier and more powerful 2% of the country.

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