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There is no subject more guaranteed to energise normally taciturn employees than one of the last remaining taboos - the size of people’s remuneration packages. You only need to open the business pages at this time of year, and a whole set of telephone numbers come tumbling out. An average payout of £233,000 for the investment bankers at JP Morgan. A £9.7bn pot for the tanned types at Goldman Sachs. The £2m goodbye wave for Eric Daniels at Lloyds has given cause for many to raise their eyebrows given the purchase of HBOS, including its disastrous property loan book.
If you ask City executives to justify such huge bonuses, they have two reasons for their mammoth handouts. First, bonuses spur on staff to perform better, which in the end is better for both the business and the wider economy. The second defence is the one given by the boss of Barclays, Bob Diamond, to MPs on the Treasury select committee last week. Unless banking chiefs paid out these vast sums, he said, they would lose their best and brightest and oh-so-rare employees (Bob, by the way, is himself in line for an £8m bonus).
Having conducted some research into the theory behind bonuses and whether they work to motivate us, there is something in what bankers say – they do. However, the evidence suggests that where bonuses would be most useful is not in finance – but in jobs such as fruit picking and working on supermarket checkouts. The people who should be getting bonuses aren’t in the glass and steel office blocks of Canary Wharf.
Take the financiers’ first line of defence, about the relationship between pay, targets and performance. In 2005, the Federal Reserve Bank of Boston published a piece of research called Large Stakes and Big Mistakes, in which a team of behavioural economists reported on experiments they had conducted with American undergraduates. The students were offered money to tap a keyboard as fast as they possibly could and also to add up some numbers. When it came to the simple chore of hitting computer keys, bonuses worked a treat: the more cash on offer, the faster the undergraduates tapped. On the more complex task of doing maths, however, incentives served to worsen performance. “Tasks that involve only effort are likely to benefit from increased incentives,” wrote the economists. “While for tasks that include an element of thinking, there seems to be a level of incentive beyond which further increases can have detrimental effects on performance”.
It seems bonuses can spur workers on to do basic mechanical tasks faster and better – clearing a field of fruit before it goes rotten, say, or scanning in multi-packs of Andrex in busy supermarkets. But on more complex tasks paying bonuses is counter-productive. The same results have been shown in other studies. When investment bankers argue that their work is so complex they need bonuses, they are contradicting the research. The history of the past few years shows that bonuses drove an entire industry to gamble – with disastrous consequences.
Now for the other argument, that financial institutions need incentives to keep these superstars. That theory is neatly quashed by Boris Groysberg in his recent book, Chasing Stars. “Moving employer on Wall Street is no big deal. You hand in your BlackBerry, pick up your coat, cross the street and in 45 seconds you can be back in business. But what you leave behind is your colleagues, your bosses, your knowledge of how your company functions – in other words, all the institutional and collective factors that made you a success, but which usually get forgotten in the acclaim for individual achievement.”
The mirage of talent is how management writer David Bolchover labels this. He argues that those skills aren’t so rare nowadays when China and India are churning out tens of thousands of maths and engineering graduates.
My own view on this is that is all makes perfect sense. In fact, bonuses in a complex organisation like a bank can often serve to generate self-motivated behaviours which negatively affect the culture of the business, and utterly fail to serve the customer. I’d be interested in your views on this research - do you think bonuses spur the banking fraternity on to deliver significant performance improvements? Or we simply jealous that we’re not one of the favoured few with a bonus in six figures?
Liz Sinclair is a Key Account Director at Interim Partners.
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January 21st, 2011 at 7:12 am
I would be happier if you found me a position rather than sending me an opinion
January 21st, 2011 at 8:16 am
Why can’t we for a change be honest about the whole bonus discussion?
Fact is, it is a discusion completely driven by envy. 100% of those condeming large bonuses would happily pocket them given the chance.
Fact is that banks can only pay gigantic bonuses when they make gigantic profits. And I rather see my bank maing a gigantic profit than a gigantci loss. If they make huge profys, they pay huge amounts of taxes, and when they pay bonuses before profit, then the profit becomes s bit smaller, they pay less taxes and have made some emloyees happy in the process. What’s so wrong about that?
It seems people forget that big bonuses are subject to 50% income tax and when the money is spent on anything from champagne to Ferraris, 20% of it is VAT, so the biggest amount - 70% - gets back into the economy anyway.
Throw in the fact the avergae investment banker is on a fixed salary of mere 80 k but has stress levels and accountability that would kill many of us, let them earn their bonus, when they don’t earn it here, they will earn it elsewhere and this contry already suffers enough from a lack of talent, we don’t need to drive pit the rest of the intellectual capital.
January 21st, 2011 at 9:12 am
I have no problem with Bankers getting bonuses based on the profits they make. However there should also be a pay back when those profits turn into losses.
It is not very equitable when the taxpayer has to pick up the losses but do not share in the profits.
The current situation where huge cuts have to be made to reduce the borrowings which were incurred to prop up the banking sector, with no pay back from those who created the losses with their greed is unacceptable.
January 21st, 2011 at 9:41 am
I agree whole heartedly with your comments. Having been a Director of a listed development business taken over by HBOS at the height of the madness, at a staggering 70% premium to market cap just 5 months before the deal was agreed, I have observed the banking bonus fiasco from close quarters.
The team undertaking the buy out had no strategy whatsoever beyond doubling the size of the business in 5 years. More effort was directed into setting up bonus schemes and incentive programmes than any other aspect of their involvement and the drive to expand at all costs lead to huge errors of judgement in buying land at inflated prices just to secure future growth.
However, what struck me more than anything was the speed with which the bank’s culture “infected” the senior executive and blinded them to the fundamentals of the business, fundamentals that had taken the business to a point where it was an attractive acquisition proposition in the first place.
I left the business some 2 years into the project and the inevitable pre-pack administration and restructuring took place in the third year of the bank’s ownership.
The problem is, they’re all up to their old tricks again and seem to have learned very little from recent events.
January 21st, 2011 at 11:50 am
The market should be allowed to weed out the weak performers and if, in reality, the research undertaken that has been referred to can be generalised to complex financial transactions then it is inevitable that either the management will come to learn this, or the business will go bust. What does need to happen, however, (the bonus issue is a red herring), is that retail and commercial banks must be allowed to operate as they used to, conservatively, and these casino type activities, must be allowed to fail unceremoniously without affecting the retail banking operations that are integral to economic growth. Future employers of these “mental geniuses” can be pre advised that the potential incoming employee ejected from a failing organisation can be seen for what they are….part of the problem. This would provide adequate support for making a recruitment decision (or not)….this in itself might bring about a more collective view within merchant banking firms that its in their long term interest to have underlying profitability…and it requires the regualtor to insist that merchant banking is set up separate and “collapsible” from high street banking. Let them pay as big as bonus as they con themselves they need to do to “retain” such mediocre intellect, and the passage above shows that people with more reasonable expectations are there waiting to pounce on bankers jobs (The Far Eastern community who have been doign a pretty decent job of ripping out our wealth generation capacity in manufacturing, wait until they finally wake up to the opportunities to do the same to our financial services sector!!).
There is a logical inevitability if we are to let the market resolve these issues in such a way that loud voices, frustration, greed and envy can not.
Best let the market resolve these issues, but as an enabler of such, change the industry’s structure so the market can finally operate efficiently - big is not beautiful and too big to fail is definately a very unattractive trait
January 21st, 2011 at 12:57 pm
We are in a period of such austerity as never seen before. Job losses are at an all time high with 20% of 18 to 25 year olds not able to gain employment. Inflation is again out of hand fuelled by increases in VAT and oil prices.
I watched a very interesting documentary ‘Britain’s Banks: too big to save?’
Where I acquired all of my included information including:-
The world’s banks have assets of more than £600 Trillion equivalent to 10 x the value of everything the world produces. The profits were turned into bonuses and giant pay packets but the profits were actually only on paper and not in cash.
The banks work on profit margins where they cannot fail to make huge profits but we must remember that it was the tax payers who bailed out the failed banks when their dangerous gambling spree with derivatives failed.
Two years on from the infamous banking collapse and nothing has changed with further huge bonus payments and pay packets. The banks are no more regulated than before with nothing to prevent a recurrence of the 2008 banking collapse.
Banks fail to maintain any capital which is a buffer against losses. In 2008 RBS had £2.0 Trillion of loans and investments with virtually no capital or cash in reserve operating at 50x equity which obviously proved disastrous. If 1 in 33 depositors withdrew their money the banks would collapse.
The banks are so intertwined with the biggest banks often referred to as HIV spreaders using what is known as shadow banking tactics through all other banks to further their wealth. It cost the world economies £9 Trillion to prevent the banking collapse and prevent a world economic meltdown.
Sir Philip Hampton (now in charge at the RBS) has admitted that the increase in wealth of the big UK banks had not been matched by any real increase in wealth outside the Banking and Financial service industries.
Today RBS have £1.5 Trillion of loans and investment (bigger than the UK’s GDP) with much the same 50x equity leverage – so no real change in exposure. With lower returns the banks have to lend more to maintain their bonus and pay packet structure while recommendations are for all banks to maintain at least 25% capital to investments. In 2008 the Basle agreement determined by the world’s bankers was 8% but bear in mind that Lehman Bros had 11% capital in place. The other banks had employed specialists to get around the capital rules so that they could continue unabated with their speculative lending.
Mervyn King, (Governor of the Bank of England) has said “Of the all the many ways of organising the banking system the worst is the one we have today”
As banks operate internationally the only way to regulate is with international agreement. If the worlds bankers who meet at Basle agreed to regulate bonus’s and pay, internationally, we could remove the argument of having to pay these huge payments or lose the top performers.
We are now in a situation because of the Governments financial shortfalls that the UK Banks are now too big to save as opposed to being too big to allow to fail.
January 21st, 2011 at 2:26 pm
Further to Russell’s comments above
We send out blog updates and assignment alerts because we want to keep the wider community of candidates up to date with what is happening in the market. If you don’t want to receive them you can log onto your profile and switch them off. We have many thousands of candidates register with us and the challenge for us as a small business is to engage with them when we do not have a suitable assignment for them. The alternative is to send nothing and most candidates do not want to just sit on a database, they want to hear from our consultants or review market trends.
The market for interim managers is both refracted and competitive. My advice to any interim manager is to fully engage with interim providers if you want something out of it. Registering an interest on our site is only the first stage in getting an assignment because thousands of people will approach us in this way and we are clearly not in a position to place them all, especially as many are unsuitable or operate within a niche where we do not.
Our motivation is place the right candidates with our clients and not to consistently increase the size of our database. As relationships are a two way street I recommend our candidates to identify the most appropriate contact in our business via our meet the team page and contact them to ascertain if we can help. If we can then it is important that the interim manager meets with us, details their experience and demonstrates why they may be more appropriate than another interim manager to assist our clients. When this has happened we are far better placed to work with them.
Thanks to all those that have contributed to Liz’s blog. I hope my addition is not preaching to the converted. I thought it important to respond as I am always keen to reaffirm that our business is based upon relationships and we want to mange expectations accordingly.
Doug Baird
Managing Director
Interim Partners
January 21st, 2011 at 8:44 pm
Its all about supply and demand for smart people isn’t it? If you pay a huge bonus to an employee it means you think they are irreplaceable. Force the banks to recruit a quota of good candidates to train as traders & investment bankers each year. Assess their performance and employ a team of highly competent HR professionals and financial analysts to measure the performance of the existing and new entrants. As the competence base grows, publish the metrics and portfolio returns for all individuals. The bank will then naturally reduce the bonuses for existing staff knowing they have equally good people to take their place. Overall levels of bonuses will fall, less irresponsible risk will be taken, overall performance will rise, Jo public will be happier, so will the politicians and the bank owners. A brilliant idea which clearly qualifies me for a huge bonus, if I had a job