Finance Corner By Chris Dickin MSc
About the author Chris Dickin MSc Chris Dickin is an independent cost reduction consultant and financial trainer, working for major companies throughout Europe, Africa, the Middle and Far East. He first trained as a Management Accountant with the Rolls-Royce Limited aerospace division in the UK. During that time, he qualified academically as a professional Accountant and he gained a Master’s degree in Financial Control. Over the next fifteen-year period, he gained a wide experience of UK Industry and Commerce, holding positions as an Accountant through to Financial Director in the finance function of several major UK companies. In 1970 Chris joined the University of Derby as a Finance lecturer. A 23 year academic career saw him progress to become the Assistant Dean responsible for resources in the Derbyshire Business School overseeing Degree and Professional courses.
Banks are well known for giving out the umbrellas when it is sunny and collecting them in again if it starts to rain, - so recent headlines in London newspapers are not surprising: LONDON DAILY MAIL HEADLINE (Referring to the Royal Bank of Scotland): “Rewards for failure at RBS: State-owned bank posts losses of £2billion - but 'casino bankers' still enjoy £390million bonus pot” LONDON DAILY TELEGRAPH HEADLINE:
“RBS boss calls £1bn bonuses 'good value'”
“RBS boss calls £1bn bonuses 'good value' RBS chief executive Stephen Hester defends the state-backed bank's policy to pay nearly £1bn in bonuses to senior executives despite the bank’s £2bn loss.” At first thought, it seems impossible, - even reckless and indecent, to pay huge bonuses to senior executives when the company returns a £2billion loss. How can you do that? How can the CEO say it is justified? Surely, it’s not reasonable? But actually, it’s quite simple. Let’s imagine you are employed by an IOC that operates in West Africa, the North Sea and the Far East. You were appointed four years ago to head up the West African operation on a contract giving you a basic salary and profit related bonus. Under your leadership, with your energy, drive and management skills, the West African division of the company has a profitable, successful year and your contractual bonus is well earned.
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Finance Corner By Chris Dickin MSc
Elsewhere in the company, in one location, things have not been anywhere near as successful for several years.
Are you likely to be well motivated for the future?
Due to a series of bad decisions by the senior managers, coupled with some highly questionable risk taking actions, significant investments in equipment have been made that hindsight now shows were a disastrous failure, - to the point of being virtually worthless. These bad investments have to be written off against the profits of all the areas of operation. Such is the size of the losses charged against this years’ operation, in overall terms the company returns a huge loss. So there is the problem, - your division has met all targets, you are due your bonus. Shall the company break its contractual obligations to you and not pay you your legally entitled bonus fearing bad reaction in the newspapers? If so, are you likely to be well motivated for the future? Will you start looking for another job? Might you even consider a legal recovery process? That is why the boss of RBS defends the payments and considers them good value. (DAILY TELEGRAPH) His alternative is to create a demoralised team of senior managers, all looking to leave the company, with the potential for a rash of legal suites against the bank that will almost certainly be successful.
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