Where was HR during the bonus fiasco?

The bankers' risk-taking and greedy bonus culture has been soundly condemned by the media. But how far was HR to blame? David Woods investigates what part they played.

Protests, injuries, clashes with police, and one death. These were the chaotic scenes - reminiscent of the infamous poll tax clashes of the 1990s - of a besieged London on 1 April 2009. This time it wasn't government policy that sparked the ire of 4,000 protesters. Their fury was directed at a small legion of staff - the greedy City bankers who were pocketing huge bonuses as the country plunged into recession.

It's a far cry from the heady days of the late 1980s - glorified by the 1987 film, Wall Street. Michael Douglas won an Oscar for portraying the darker side of this industry as Gordon Gekko, a scheming megalomaniac taking part in risky deals and living by his now infamous affirmation: "Greed, for lack of a better word, is good". Skip forward 20 years to the City of London and it was Goodwin (Sir Fred) - and his £703,000 pension - not Gekko that came to personalise a sector, sick to the core, and bringing the country down with it.

But while much has been written about the leadership of these banks, surprisingly little has been said about HR's culpability as the people in charge of remuneration-setting. As investment banks and financial institutions are shamed in the press and their CEOs dragged are across the coals, HR professionals have remained conspicuously silent. And it begs a question: where was HR when employees in the financial sector were being incentivised by their 'mega bonuses'?

When HR magazine approached the HR directors in some of the investment banks at the heart of the bonus fiasco, it was greeted by further silence. Goldman Sachs accepted a $10 billion bailout from the US treasury last year. In July the bank announced it would be giving staff a pay and bonus pot of £12.3 billion. HR asked the bank how far its HR department was involved in the decision but a spokeswoman said it could not give any comment on the subject of bonuses. It was a similar story at Morgan Stanley: "On this occasion we will decline to comment," it said.

What about Royal Bank of Scotland? In February it was reported to be paying out £1 billion to staff in bonuses. Less than a fortnight later, common sense seemed to have returned: awards to staff would now be based on sustained long-term performance, not short-term revenue generation. The bank's existing profit share bonus scheme has now been terminated so those associated with the 'major losses' of 2008 would not enjoy a pay increase or bonus. When HR asked the firm's head of HR, Neil Roden, to talk about his involvement in these issues, he was unfortunately 'unavailable'. Later, an industry insider suggested he "would not have been directly involved in remuneration issues" anyway.

Is that 'not directly involved', or involved but doesn't want to talk about it? Two-thirds of respondents in an HR magazine poll admit HR in their organisations does have a say on remuneration strategy, so are HRDs involved in bonus structures getting away with it?

Chris Roebuck, ex-global head of talent at UBS, and founder of Transformation, defends the banking elite. "There was no culture of greed in the banks," he asserts controversially. "The crisis happened because those at the top of organisations were not asking the right questions about what was going on. They didn't know the value of the deals they were working with."

Chris Bones, dean of Henley Business School, does not accept this. He says: "HR is complicit in designing remuneration strategy. The past 10 years has seen a long-term acceleration of greed regarding bonuses and HR sat on these boards and watched it happen."

So who's right? Although it is true HR directors are responsible for negotiating pay deals in most sectors, it is more unusual for HR to control remuneration in the financial services sector. This, says Jon Terry, partner and head of reward at PricewaterhouseCoopers, means the finger of blame cannot be pointed directly at HR departments in the financial sector: "In these organisations HR directors may not have been sitting on boards, but were represented by other board members. HR directors would probably not have been on remuneration committees. Although they are part of executive teams that run the business, the reward strategy would have been decided above their heads."

But Dona Roche-Tarry, managing partner at global search firm CT Partners and former head of HR for commercial banking at Barclays, says when she was an HR director she reported directly to the CEO. "The HR team should be held equally responsible for the issues with bonus strategies. They work alongside the CEO and MDs to recommend strategies for pay and bonuses particularly at executive level."

What is certain is that reward in the financial sector was out of kilter with the rest of the economy. In essence, traders and bankers received bonuses based on the volume of deals made rather than the profit they were bringing into the business. Alistair Milne, reader in banking at Cass Business School and author of The Fall of the House of Credit, explains: "Credit products are complex. HR was calculating bonuses based on something they did not fully understand. "

According to Terry, 80% of business leaders do not rate HR as an important strategic function and, if a department is not credible, its input on issues such as bonuses is not seen as being valuable. But if HR directors did not understand the credit products upon which bonuses were based, shouldn't they have made it their business to do so?

Roebuck explains: "To people on the street these structures look obscene, but it is not seen that way in the banking world. Banks lose staff because a competitor is offering an absolute fortune in a remuneration package."

According to Charles Cotton, adviser on reward and employment conditions at the CIPD, these market-led remuneration rates came at the expense of carefully thought-out and designed remuneration strategy.

Bones adds: "I think it is time for HR to eat humble pie. If a small number of people walk away with big money, HR is not doing its job properly. It should not have let itself be held to ransom by senior executives. If HRDs say they were not involved in remuneration decisions, then I say fire the HR departments."

Penny de Valk, chief executive of the Institute of Leadership and Management, agrees. "Why was HR not an active participant in discussions about remuneration?" she asks. "It is time for a more robust debate on the issue."

De Valk may be raising these questions, but at an industry-level at least the CIPD has been ambivalent about the issue. Initially, Cotton said: "HR wasn't involved in bonuses in investment banks a great deal." Then as HR was going to press, he announced that HR professionals should ensure executive pay packages do not lead to inappropriate risk-taking.

In August the prime minister, Gordon Brown, said bonuses for bankers should be based on long-term success rather than "speculative gains" and banks should claw back bonuses from staff reward over a period of time if their performance suffers.

But while governments in France, Germany and the US have taken steps to legislate against excessive bonuses, the Financial Services Authority (FSA) has said it will not get involved in the remuneration of individuals (see p28).

This puts the onus back on employers and there are lessons to be learned for HR directors across all parts of the economy to consider reward and recognition of staff more carefully to avoid a repeat of the events of the past two years. But if HR is to take part in educated debate it has to first prove its worth by suggesting strategic viable alternatives to 'mega bonuses' that still support the overall direction of the business. And some say they have lost this power to a growing raft of remuneration consultancies.

These consultancies have made a business out of advising employers on pay and reward. But Katharine Turner, principal at one such consultancy, Towers Perrin, defends her involvement: "I have seen articles suggesting 'too much power is imputed to consultants' but we are not business consultants - that is not what we do. And if boards did not understand the deals going on in their trading floors, how could we?"

It appears HR is also using lack of knowledge of the business as an excuse for its failings with bonuses. Turner explains: "FTSE 100 HR directors are not compensation experts. Their roots lie in people management not business management." However, she does add: "They have to get clued up."

The Walker Review released in July recommends more transparency in pay and bonuses in the City and codes released later by the FSA advocate less risky structures, with bonuses based on the longer-term. "I can't argue against transparency, but the codes are not as tough as I thought they would be," says Cotton. "The Government shouldn't get involved in bonuses because it could lead to unintended consequences."

The Treasury was unable to put a minister forward to comment but a spokesman said : "The chancellor has been clear that the short-term bonus culture must end. Reckless pay and bonus policies at banks right around the world contributed to the financial crisis. He will be taking forward Sir David Walker's proposals to reform the rules governing executive pay."

For HR to get the credibility it needs, David Coates, associate director at The Work Foundation, says: "HR has to become more than simply a compliance function. After the recession a new culture will come into the financial sector. HR does not necessarily have the authority to drive this culture, but HR directors can create a position for themselves as the custodians of fairness and concentrate on staff engagement."

HR directors in the financial sector must first consider what behaviours they are engaging. A more ethical performance from traders would be ideal and de Valk advocates reward for this behaviour "so people are not paid too much for doing the wrong thing", or more reward for teams rather than individuals. Milne and Roebuck suggest a percentage of bonus pots could be donated to charities rather than given to individuals. But retention is key as employers compete for talent, so some form of incentive will always be essential. Roebuck says: "Data suggests money is not always the main motivator anyway. Technical ability, respect of peers and subordinates as well as the regard of the boss can all incentivise."

HR has the potential to lead these initiatives. It may be only one voice on a board of directors - but a strong voice can make itself heard and receive the support it needs from other departments within business. Jane Shaw, MD of Resource Innovations, explains: "Remuneration is changing and we are seeing employers taking on HR staff who have the ability to understand the technical side of reward and the data management that comes with it.

"The role of reward professionals is evolving," she adds "These people will not be HR generalists. I think over the next five to 10 years, these reward directors will become HR directors, if they have the technical skills as well as people management skills such as talent and retention management. A change in business structure will allow this."

This kind of business ability proves wrong the critics of HR who think it is mediocre and non-strategic. And Mark Adams, HR director of Abbey, is one of this breed of HR director who has moved from a background of reward. He explains: "I am still heavily involved in remuneration. I am the lead person on our HR team on that side and I am closely involved in how the FSA codes will be implemented at Abbey."

Abbey, now part of the Santander Group, has weathered the recession well, reporting a 25% increase in profits in April (See interview, HR, July 2009). Adams explains the company is made up 85% retail banking and 15% investment banking. He is quick to point out that retail banking and wholesale banking, despite the view of the FSA, are two different kettles of fish with regard to remuneration. But, he says: "It is important to remain competitive on pay in the financial sector although we have a risk structure that will never allow us to get into trouble."

At Abbey the employee value proposition is as much an important retention tool as bonuses. "In the past Abbey has been thought of as conservative (on pay) but we have proved ourselves to be virtuous and as a result can attract talent. People come to us because we are a prudent and safe place to work. We want longevity with our staff and I know we cannot achieve that through bonuses alone," adds Adams.

A sequel to Wall Street is planned to hit cinemas next year, according to the New York Times, and Michael Douglas will reprise his role. This time the setting is just before the crash of 2008 and Gekko will attempt to behave ethically.

Hindsight is a wonderful thing, but following deregulation of the financial sector in the 1980s and 1990s and the glory days of banking in London, few traders, or their HR directors, imagined the boom would end. It did, and now, as HR picks up the pieces of mass redundancies, manages talent and prepares for recovery, the opportunity has never been greater for this undervalued function to prove its worth and play its part in making sure a financial crisis of this scale will remain firmly in the past.

- For more on the topic, go to hrmagazine.co.uk/search/articles/phrase/bonus

VINCE CABLE, deputy leader and shadow chancellor for the Liberal Democrats

Q: How far is the culture of bonuses to blame for the financial crisis?

A: There is quite a lot of hard evidence from politicians and others that bonus schemes did encourage people to take excessive risks, which in turn led to the financial crisis.

Q: Should legislation be imposed to curb excessive risk in the City?

A: The job of regulators (such as the FSA) is to curb excessive risk. But it is not up to the Government to fix pay for individuals. I think the tax-hungry Government will most likely implement taxation on bonuses rather than capping them. This means tax avoidance will become an issue and HR directors who try to help staff avoid paying these taxes will find themselves under scrutiny.

Q: Should employers in the financial sector reconsider how they engage staff with bonuses?

A: Yes. HR directors will have to anticipate change and re-engage. I think there will be a move away from bonuses towards more stock-based arrangements linking remuneration to long-term profit. The other change we will see is more transparency and staff pay and remuneration will have to be declared. This means the highest-paid employers will move on to the radar - and again this is something HR directors need to think about.

Q: Will getting rid of short-term bonuses stave off another crisis?

A: I think lightning will strike again - just not in the same place.

MARK HOBAN, shadow finance secretary for the Conservatives

Q: How far is the culture of bonuses to blame for the financial crisis?

A: Big rewards for short-term gains increased risk-taking and put the viability of banks and financial institutions at risk. While traders made big profits and bonuses trading financial products, the risks inherent in these products only crystallised later.

Q: Should legislation be imposed to curb excessive risk in the City?

A: We will give the Bank of England the power to force banks to hold more capital to curb excessive risk. Inadequate capital requirements enabled them to use their retail deposit base to subsidise their risky trading activities. By requiring institutions to hold higher capital we will force the banks to confront the true cost of these activities and thus restrict them.

Q: Should employers in the financial sector reconsider how they engage staff with bonuses?

A: They will need to shift the focus from short-term rewards to long-term value creation. Of course, these discussions will have to take place in the context of businesses recruiting and retaining staff in what is a highly competitive market for talent.

Q: Will getting rid of short-term bonuses stave off another crisis?

A: A better system of bonuses, aligning employee remuneration with the long-term interests of businesses and their owners, should create a more stable economy.

- Where does the FSA stand?

Inappropriate remuneration policies were a contributing, not a dominant, factor in the financial crisis. But, in saying that, a response from firms on remuneration is needed to lay the foundations to avoid a similar situation occurring again.

Our intention is not to determine individual remuneration levels, but to link pay and bonuses to sound risk management. The UK was the first country to set a prescriptive code on remuneration, but it is not for the FSA to place pay caps on individuals. This is not what we consulted on and falls outside of our remit, which is set by Parliament.

We will expect firms to supply a remuneration policy statement this month. It should cover a firm's objectives and strategy when it comes to their remuneration policy including their attitude to risk and what checks and balances the firm has in place. If they have not complied with our code, we will want to know why. This will then be followed up with supervision visits where we will be ensuring compliance with our code and will include checks of individual contracts.

THE CREDIT CRUNCH CHRONOLOGY

- 9 August 2007

BNP Paribas announces it can no longer value hedge funds - first clear sign banks are reluctant to do business with each other and marks the start of the credit crunch

- 13 Sept 2007

Northern Rock asks the Bank of England for emergency funds

- 19 Sept 2007

UBS announces $3.4 billion loss, mostly from sub-prime related investments;

Citigroup reports $3.1 billion loss - which rises to $40 billion over next six months

- 30 Oct 2007

Merrill Lynch CEO resigns - $7.9 billion exposure to bad debt

- 6 Dec 2007

Bank of England cuts interest rate to ...

- 9 Jan 2008

The World Bank predicts global economic growth slowdown in 2008

- 21 Jan 2008

The FTSE 100 suffers its biggest fall on the market since 2001

- 31 Jan 2008

MBIA announces a loss of $2.3 billion

- 17 Feb 2008

Government announces Northern Rock is to be nationalised

- 17 March 2008

US investment bank Bear Stearns acquired by JP Morgan Chase

- 21 April 2008

Bank of England announces a plan worth £50 billion, which will help credit squeezed banks swap mortgage debts for Government bonds

- 8 July 2008

British Chamber of Commerce predicts recession within months

- 30 August 2008

Chancellor of the Exchequer Alistair Darling admits Britain is "on the brink of the worst recession for 60 years".

- 5 Sept 2008

FTSE 100 shows its steepest decline since 2002

- 10 Sept 2008

Lehman Brothers reports $3.9 billion loss in three months to August 2008

- 15 Sept 2008

Lehman Brothers collapses; Merrill Lynch is taken over by Bank of America

- 17 Sept 2008

Lloyds agrees to take over Halifax Bank of Scotland (HBOS)

- 28 Sept 2008

FSA chaiman Lord Turner announces the FSA may penalise banks for awarding bonuses to staff taking excessive risk. It would not regulate how much was paid but they would have to explain bonus structures

- 29 Sept 2008

Bradford and Bingley is nationalised

- 3 Oct 2008

FSA raises the amount of deposits guaranteed if a bank is bailed out to £50,000

- 8 Oct 2008

Government announces ambitious £50 billion rescue plan for UK banks

- 13 Oct 2008

Government puts £37 billion into RBS, HBOS and Lloyds

- 19 Nov 2008

Research by trade union Unite shows basic pay and bonuses of CEOs at RBS Lloyds TSB, Barclays and HSBC totalled £52 million plus. Unite's Derek Simpson says: "Pay practices have contributed to the worst financial crisis in decades."

- 23 Nov 2008

Citigroup reports a 60% drop in its shares in the space of a week

- 11 Dec 2008

Bank of America cuts 35,000 jobs including Merrill Lynch staff

- 31 Dec 2008

FTSE 100 closes 31.3% lower than at the start of the turbulent year

- 16 Jan 2009

Citigroup announces another loss of £5.6 billion

- 23 Jan 2009

UK officially enters recession with a reduction in GDP of 1.5%

- 24 Jan 2009

US president pledges 80% of recovery plan spend within 18 months

- 8 Feb 2009

Following reports RBS is to give staff £1 billion in profit (in the process of making 107,000 staff redundant), chancellor Alistair Darling says there is nothing wrong with bonus system that rewards success but a bonus system that rewards failure and excessive risk has got to stop

Shadow chancellor George Osborne adds: "At a time like this cash bonuses for people who have been involved in the higher echelons of a bank is simply unacceptable"

- 10 Feb 2009

RBS chairman Sir Fred Goodwin and HBOS chairman Dennis Stevenson apologise "profoundly and unreservedly" for their banks' failings leading to problems in the banking sector.

On the same day, RBS announces 2,300 job losses

- 18 Feb 2009

RBS announces it will not award pay increase/bonuses to staff associated with major losses of 2008

- 25 Feb 2009

Standard Life cuts 195 jobs

- 26 Feb 2009

Royal Sun Alliance sheds 1,200 jobs

- 2 March 2009

HSBC reports a drop in profit of 62% from the previous year

- 25 March

1,200 HSBC redundancies

- 2 April 2009

G20 meets in London to decide "sustained effort" to tackle the recession. They pledge £681 billion in aid

Aviva sheds 1,100 jobs

1,150 jobs go at Swiss Re

- 7 April 2009

RBS sheds a further 4,500 jobs

- 15 April 2009

UBS makes 8,700 redundancies worldwide

- 22 April 2009

Budget speech prediction: UK economy will shrink by 3.5% in 2009

- 1 May 2009

UK Treasury Committee announces banks have made an "astonishing mess" of the financial system as MPs warn the effects of the recession will be felt "for generations"

- 18 May 2009

Research from law firm Pinsent Masons shows 84% of employers think FSA code will not make a difference to remuneration and 78% do not plan to review their severance arrangements and payout levels

- 19 May 2009

Lloyds Banking Group makes 625 redundancies

- 20 May 2009

Barclays sheds 350 jobs

- 9 June 2009

UK unemployment reaches 2.2 million

- 10 June 2009

US banks repay the US Treasury the government bail-out loan

- 17 June 2009

US announces a major reform of its banking regulations

- 24 June 2009

Organisation for Economic Co-operation and Development announces the economy is nearing bottom of worst recession since the end of Second World War

- 30 June 2009

A further 2,100 jobs go at Lloyds Banking Group

- 14 July 2009

Goldman Sachs pays bonuses of £6.65 billion to staff

- 16 July 2009

The Walker Review recommends bank bonuses and pay should be more transparent for high earners - their remuneration deals should be included on annual reports

- 17 July 2009

1,200 more redundancies at Lloyds

- 12 Aug 2009

FSA introduces codes requiring large organisations to implement remuneration packages consistent with effective risk management

- 25 Aug 2009

Lloyds announces 7,500 jobs shed since Jan 2009

- 26 Aug 2009

French president Nicolas Sarkozy unveils measures to limit bankers' bonuses deferring them over a three-year period with a third paid out in shares. He urges UK to follow suit

- 4 Sept 2009

G20 finance ministers meet but fail to agree plan to impose a cap on bonuses financial sector workers can receive, but accept a 'clawback' scheme to ensure bonuses are linked to the long-term success of deals and could be forfeited if they later fail to deliver