Why Northern Rock is right to pay staff bonuses

Jan 23 2009 by Andrew Hebden, The Journal

THEY were having a field day on the Daily Mail website message board: "Disgusting!" "They are lucky to have a job at all!" "Outrageous!" "I wouldn’t pay a penny into this wretched outfit!"

It certainly seems that the story about Northern Rock’s bonus payments to its 4,400 staff - splashed across the Mail front page yesterday - caught the imagination of Mrs Angry from Middle England.

The public reaction is hardly surprising, given the sensationalist terms in which the story was reported and the backdrop of a worsening crisis. But let’s take a moment to examine the facts.

The bonus scheme was agreed last year as part of the bank’s nationalisation programme and was made public in October. The 10% payment, which is due today, is the first part of that and is recognition of the bank’s success in paying back the first quarter of its loan from the Government.

Under the plan, the staff are due to receive a further 15% once the entire loan has been repaid and another 25% when the Rock is eventually returned to the private sector.

I understand that the figures bandied about yesterday are slightly higher than the reality, with the average salary at the Rock somewhat less than the quoted figure of £20,000. Even so, the total amount being paid today is likely to be not too far short of £9m.

So that brings us to the big question: is it the right thing for the Rock to do?

Firstly, it should be noted that if the Rock was not to pay these bonuses then it would mean tearing up an agreement with its staff that is less than six months old. It would be an odd way to repay a workforce that has actually over achieved in the sense that the Rock has repaid more of its Government loan than was originally envisaged.

If an error was made, then it was at the time when the bonus scheme was conceived.

Paying these bonuses was always going to sit uncomfortably at a nationalised bank during a time when there is unprecedented public anger over the culture of bonuses paid to so-called Fat Cat City bankers. Around £50bn has been paid out in the form of such bonuses in London alone over the past decade and they have contributed to the culture that is at the heart of the global financial crisis we now face.

The problem is they encouraged bankers to indulge in short-term reckless lending with little thought for the long-term consequences. The Government is right to have pledged to legislate to prevent this happening again. Some of the stories which have emanated from the City over the past few months have been obscene.

Northern Rock has been synonymous with the concept of reckless lending for some time. It was the architect of some of the most irresponsible mortgage deals and has rightly been castigated for its business model which, by relying heavily on international money markets, was irresponsible in the extreme. Sadly for the reputation of this once great institution, it has also not been immune from the bonus culture that infested every big financial institution over the last 10 years. Most famously, of course, its crest-fallen chief executive Adam Applegarth departed the company with a £750,000 pay-off in December 2007 having overseen the Rock’s rapid growth and equally swift downfall.

Bonuses have, therefore, had a bad press. And with some justification. It’s hardly surprising that the scheme which will pay out today has been shrouded in some controversy.

But to draw parallels between it and the examples quoted above is disingenuous. And to assert that all bonus schemes necessarily drive greed and obscure one’s long-term objectives is also a falsehood.

The Rock’s current bonus scheme was not designed to encourage risk taking or reward short termism. Quite the opposite, in fact. It has been drawn-up to recognise success by the new management team and the staff in delivering on the bank’s restructuring plan which is necessary, not only for its own good, but also for the taxpayer who has invested a fair sum of cash in the business.

This is exactly why businesses should have bonus schemes: to encourage good practice and reward success. Too often these bonuses have paid grotesque amounts even larger than the individual’s salary. This is not the case with the Northern Rock scheme.

It is also important to recall the context in which the scheme was established. Northern Rock was a failing business that needed radical surgery, which was expertly carried out by executive chairman Ron Sandler and subsequently new chief executive Gary Hoffman. This was a painful exercise, something easily forgotten in the wake of the mountain of job losses that have followed since. The 1,300 redundancies made by the Rock remains amongst the biggest single wave of cuts since the financial crisis began.

This was a bonus scheme designed, then, not to line the pockets of fat cat executives and certainly not those who were to blame for getting the Rock into its current predicament.

Rather, its purpose was to reward staff who have performed to the best of their ability despite the upheaval caused by the departure of many of their colleagues.

When they open their pay packets today to find details of their bonus, they should see that as recognition of the part they have played in bringing the Rock back from the brink.

Andrew Hebden is Head of Business and Business Development at NCJ Media