Fair Shares?

Today, the Rt Hon Gideon George Oliver Osborne, heir to the seventeenth Baronet, made his well trailed announcement on bank bonus payments. The basic thrust of his idea is straightforward: any bonus of more than 2,000 notes has to be paid in shares. Sounds reasonable. But a regular visitor to Zelo Street had already been in touch to point out that this kind of scheme has a downside.

Bonus payments made in company shares are commonplace in the USA, and that has implications for many UK workers, if their firms are based (or, as current speak likes to put it, headquartered) in the US. Some share bonuses are substantial in size, and human nature being what it is, their recipients have hit on a way of making them yet bigger: take actions which will get the share price moving upwards.

And those getting the biggest bonuses are invariably in that rare position: being able to influence policy directly. This they do. The result is, generally, that those at the bottom of the pile get worked harder (also known as “sweating assets”), along with less generous conditions of work, together with the occasional pay cut. This kind of behaviour plays well with investors, who then favour the company by buying their shares. Investors and management are both happy.

However, the continual handing out of tranches of shares in lieu of bonus payments has a drawback: it dilutes the capital base of the company. So what? Well, the effect of more and more shares being issued merely to keep within bonus rules, rather than on the back of actual growth, is likely to put downward pressure on their price. So management have to take yet more action to keep the value going up. No prizes for guessing who gets to take the hit.

Of course, those bonuses could – make that should – be paid out of profits, but if the law says they have to be paid in shares, the temptation is routinely to print shares and leave the profit alone: after all, the more profit available for share dividends, the better the price commanded by the shares.

Not only has Young Dave’s pal not touched on any of this, neither have Labour or the Lib Dems. As with the credit crunch and bank bailouts, politicians generally pick it up as they go along. They then tell of the correct calls made, of economies steadied and jobs saved.

But they tend not to lead.