RBS (LSE: RBS) Loses More Than 1,000 Investment Bankers Over Government Interference in Bonuses

Proving that government interference in the market always has a negative impact, over 1,000 investment bankers have left the Royal Bank of Scotland (LSE: RBS.L) since the British government gave bailout funds to the bank and assumed it then had the right to determine what the pay of the bankers were, according to a report from Times Online.

I of course oppose the bailouts and the resultant increased interference of the government in the affairs of business, but I want to focus on the pay and bonus side of the issue, as a number of people have asserted it wouldn’t have a negative impact on employees moving to rival firms which pay more, and this one major example proves otherwise.

The 1,000 workers represent under 5 percent of the overall staff in the investment unit of RBS, but they account for close to 8 percent of the over 2008 income generated by the division. This means it wasn’t just a bunch of lower-echelon workers leaving the company, but many that generated significant revenue. Estimations of the revenue generated by those that left RBS is somewhere between £600m and £700m in 2008.

Unnamed sources in the banking industry claim if the British government sticks to its guns over forcing bonuses to remain low, it could stir up another mass migration from RBS, causing a major problem for the company in that investment banking is considered the major hope for helping RBS and the overall industry to rebound.

The board of RBS has been battling to turn things around, fighting to have the bonus pool increased by a minimum of 50 percent to close to £1.5 billion.

Other rival British banks have already responded to continual government threats of cutting back on bonuses by raising salaries. This is a defensive move to keep their own people from being poached like they’re poaching others’ people.

Among those targeting RBS for workers are Société Général, Barclays Capital and Normura. Barclays itself has tole their people it will double the salaries of their people a prorate it to June 2009. The deals made with the people they’re taking from RBS is also with high base pay rather than bonuses, which the RBS workers are obviously responding to.

This is why there should have never been any bailouts and the inevitable assumption by any government in the world that taxpayer money means more oversight. The problem is governments are clueless how to run business, and their interference in business is always disruptive rather than helpful, as you can see in this case.

As for RBS, it’s soon to be almost wholly owned by the British government, with the state owning 84 percent of the shares of the company.