Why are bonuses still necessary?

9 February 2009

2 minute read

Contrary to expectation, it seems a comfortable majority of people are still receiving bonuses this year.

We ran a poll enquiring about bonuses a couple of weeks ago (ie. before European banks announced, but when most US banks had already revealed their numbers); 75% of respondents said they'd received some form of payout.

An even larger majority of bonus recipients felt their bonus was deserved and reflective of their hard work.

Since then, the furore over the award of bonuses at institutions which have received money from the state has intensified. There are accusations of 'raw capitalism' and calls to 'bring back the guillotine'.

Paying bonuses is starting to look very much like showing a cauldron to an Inquisitor or waving a red rag at a bull. The US website The Daily Beast says banks have badly screwed up their PR and would have been better off publicly freezing all salaries and bonuses (or maybe paying nothing at all) until things died down.

Given the public backlash, has it been a mistake to pay bonuses at all this year? Bob Diamond apparently thinks not - he tells The Guardian today that BarCap has "performed well in a difficult environment."

But are bonuses really still necessary now that the 'war for talent' has been relegated to the distant past?

And why do employees at loss making banks, or banks in receipt of taxpayers' money, merit performance related pay at all?

Let us know below.

AUTHOReFinancialCareers UK

Insider Comment

Co
Convex
25 March 2009
It's a question of culture, for years banks have been a place where managers have stressed the importance of the individual's achievements. If the bank made money and you didn't make your budget, you were out. So pay as a function of individual rather than collective performance became part of the "social contract" of banks. If suddenly the rule changes, whether it was a just rule or not, people feel cheated, obvious. The former culture had its justification in a world where it was not possible for 5% of the workforce to blow up the remaining 95%'s balance sheet.
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Ma
Mau
16 March 2009
Possibly, the bonus for those employed by the quasi-nationalised banks should come in the form of a tax rebate of 0.5% or so.
Just to make you feel good when you have worked for Mr Gordon Brown and his inspectors at the FSA. Beware, they might wear the glove ...
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Go
Golden boy
13 February 2009
The inevitable sequence of events is this. Some banks will pay ridiculously small bonuses. Some of the people working for them will tolerate it. The best people though will either go to another firm or stop working at all. These banks are doomed. Eventually smaller aggressive banks that were not affected so badly by the crisis will hire some of the best people and play hard. It is an extremely competetive environment. If I was a shareholder and heard that my bank reduced bonuses by 95% I would sell immediately!!
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si
sitting duck
13 February 2009
Seems to me there clouding of the issues here. You have to take each area as seperate. Clearly a failing bank should not be giving bonuses to its top men, they've failed, but that doesn't mean the desk clerk on a pityful wage has done a bad job, they need that extra cash and incentive.
Using a prior example of war. If the leader of one of your batallions strikes a great battle victory, you reward him with a medal and it inspires people around him to do the same, yet if you lose the war its the commander in chief that needs to take the fall- rightfully so, thats what they are there to do.
Its the big picture and seperating areas out - ultimately the guys at the top take the responsiblity, thats what there paid for and rewarded when they do well, the middle guys if preform well deserve praise and incentives, otherwise how do you inspire workers?
On the flip side, i'm not defending arrogance or "god complex" people, there has to be reforms to the bonus culture, and i think Hornby got it right when it should be linked to mid to long term preformance. To legislate on this however, is going to be a tough call.
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fx
fxo man
12 February 2009
Deepak - i hate to reiterate my criticism of Alex, and to labour the point, but you quite clearly do not understand (a) my points or (b) how banking [or, indeed, other successful commercial operations] operate.
Profitable parts of the Post Office? Maybe, but the kind of work done by MOST of the staff at the post office are, at best, semi-skilled. I don't see the point you're making... as far as i can see you're just trying to be funny! (which is fair enough, but contributes little to the debate)
Finally, correct me if i'm wrong, but i THINK you're alluding to the fact that many of the bank shareholders are now the taxpayer? This is true, but then all the more reason to want to preserve (and grow) what little value remains (little in % terms, but billions of pounds in absolute terms). By simply sacking everyone, or paying zero bonuses we will just drive talented employees, capable of making money, away to other institutions.
Re-read what i initially said about cutting off nose and spiting faces...
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