Bankers Bonuses An Incentive To Fail?
It is good to see that at long last the bonus culture that exists in our financial industry are being looked at though you just can’t help feeling that a fudging of the issue will be the eventual result.
Humans have always lived by a sort of bonus culture. We take risks and we get rewards. It has been that way since the first caveman hunted a dangerous animal for food. The rewards we can get are what drives us on to achieve and without it we would probably still be living in caves.
The difficulty with the finance industry is that nothing is real and rewards have been given for what turned out to be disastrous actions. You can see the logic that someone makes millions of profits for a bank and gets a reward of perhaps one tenth of one per cent for doing so but what are you to do when you find your reward system is flawed and the over time you find that their actions lost you money. Like any gambler, you are only in profit when you walk away from the table and cash in your chips.
The anger among the general public is clear and it has been rumbling around for years. The fat cats may argue that bonuses are justified and essential to keep the top people working for the banks but it also has managed to encourage company employees to gamble (Let’s call a spade a spade… ) and lose because their personal risk reward ratio favoured gambling rather than cautious investing.
Perhaps we are unfairly blaming only the banks. The whole of society has been looking for and expecting big rewards and we have given up on looking to the long term. Ever since the 1980’s we have been moving towards the situation we find ourselves in today. Short term gains have become the aim and computerisation of markets has enabled trading to be done in the blink of an eye.
Perhaps it is time we took a breath and thought about where we should be heading. Bonuses have a place and success should be rewarded but we should think very carefully before we agree bonuses and ensure they are for genuine and long term achievement and not for the gamblers who have success one day and then failure the next.
While we are at it maybe we should look at executive pay. How do you value a company executive? Should they be worth 10 times the salary of the sales staff or customer support? 100 times or maybe 1000 times? Those at the front line of any company may well work harder, feel more stressed and put at least as much effort into their work as the CEO but their efforts may go unrewarded.
Perhaps the biggest question of all is whether companies pay enough attention to their shareholders. It should be the shareholders, the owners of the company, who decide on any bonus payments. Company management do portray an image of listening to shareholders but the general pattern seems to be that they feel they can do whatever they like regardless of what shareholders think. The problem may lie with the pension funds who control the bulk of most shares in companies and seem all too happy to go along with the management view and avoid rocking the boat. Perhaps if they had kept their eyes on what the banks were doing they might have spotted that things were not as rosy as we were told.
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Comments
FatherB
Thanks for your comments. I wasn’t meaning to be critical of small shareholders. I agree the small shareholder knows far too little about what their company is doing but the large investors such as pension funds are better informed and should have people delving as deep as possible into what is really going on behind the scenes. They themselves represent thousands of investors and have a responsibility to ensure their money is invested wisely.
My complaint was about them simply accepting the party line and not wanting to question the management.
I have every sympathy with the small shareholder who I feel is left out of the loop.
nice post Sid. Agree with pretty much everything.
Although, I think you put too much blame on shareholders. Shareholders have to trust that the companies they invest in are being truthful and honest in their dealings. The very opposite has been the case recently. Pension funds and the like are investing in many hundreds of different companies; they can’t be asked to run the companies for them as well.
I remember watching the 2008 AGM results of RBS live and seeing Fred and the others tell everyone that there was no more exposure to bad debts and that everything was rosy looking forward. The deal with ABN was a great deal and that no-one should worry. How much they lied. In fact so many lies were told that day, it is a wonder those accounts haven’t been delivered to the police as fraudulent documents. To blame shareholders when all they have to go on is the accounts information presented to them is a tough call.