Bonus Payments (Financial Sector)

Oral Answers to Questions — Treasury – in the House of Commons at 10:30 am on 5 June 2008.

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Photo of David Hamilton David Hamilton Labour, Midlothian 10:30, 5 June 2008

If he will initiate research into whether bonus payments to those working in the financial sector have an effect on the rate of inflation.

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I believe that bonus payments should be tied to the performance and increased performance of companies.

Photo of David Hamilton David Hamilton Labour, Midlothian

While it is true to say that the £15 billion paid out in City bonuses last year has fallen back to £7 billion, which is a meagre drop, two directors have received personal bonuses of £200 million. Does the Chancellor understand why the public sector is asking why there is one rule for some and another rule for others? Surely such bonuses must have an inflationary impact, and we should review that position.

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I do not think that that has a terribly significant inflationary impact, and of course, all bonuses are taxed, usually at the higher rate. However, when boards fix bonuses for their executives, they should ensure that they are tied to the long-term interests of their companies. That has not always happened in the past, as we have seen. It is important that people are given incentives to consider what is in the long-term good of the company involved, because that must be in the best interests of our whole economy.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

As the Government are now the owner of one of the largest mortgage providers in the country, what inflationary impact has the Chancellor caused by paying £1 million to the chief executive of Northern Rock? Can the right hon. Gentleman name any other chief executive of a mortgage provider who earns more than £1 million a year?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

The Government have indeed taken temporary ownership of Northern Rock. We had to employ staff, and we had to pay the appropriate rate. Frankly, I would rather pay the appropriate rate, get some good management in there, sort out the problems of Northern Rock and then return it to the private sector. I am sorry that the hon. Gentleman does not support that.

Photo of John McFall John McFall Chair, Treasury Committee, Chair, Treasury Committee

Warren Buffett, the world's richest financier, said this about the credit crunch a couple of weeks ago:

"The banks exposed themselves too much. They took on too much risk. It's their fault. There's no one else to blame."

But despite that reckless disregard of risk, the banks have rewarded the bankers, in particular, in both good and bad times. The Governor of the Bank of England and the Financial Services Authority have expressed concern to the Treasury Committee about that structure. Will the Government work with us in our financial stability and transparency inquiry to ensure that we have a payment system that rewards success only and not failure—today, we have seen a profits warning from the Bradford and Bingley and the chief executive has departed with a golden nest egg?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I think that the chief executive of that bank is retiring for health reasons. On bonuses generally, I said just a few moments ago that I believe that boards should ensure that the way in which they reward their executives ought to be geared towards the long-term improved performance of their institutions, and that has not always happened. On my right hon. Friend's general comments, it is quite obvious that a number of banks did not understand the nature and scale of the risks to which they became exposed. However, that does not help any of us in the immediate period, because we have to live with and resolve the consequences; but I agree that boards ought to be far more diligent in ensuring that they reward people for doing things that are right for the company in the long term, because the public and their shareholders expect that people should be paid for success and not for failure.

Photo of Henry Bellingham Henry Bellingham Shadow Minister (Justice)

Does the Chancellor agree that the huge bonus paid to Adam Crozier is completely unjustified, when small but viable rural sub-post offices are being closed?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

On post office closures, as the hon. Gentleman will know, a problem that has faced our Government and his Government before that is that, over the longer period, fewer and fewer people use post offices. The National Federation of SubPostmasters recognises that problem, which is why the proposals that I put forward a couple of years ago were designed to ensure that there was a viable network, but there is no getting away from the fact that we must ensure that the Post Office is properly supported. We have put a great deal of public money into the Post Office, but we must also ensure that the network is viable. To pretend that it can be easily fixed or to do something else would be quite wrong.