We have all heard more than enough about bonuses over the last year. The numbers are astonishing and to the vast majority of people who may be struggling simply to pay their bills the amounts of money paid out by financial companies in bonuses is offensive.

I don’t think people object to the principle of bonuses as a reward for exceptional work but many of these huge bonuses seem to be paid out just for turning up at work and doing the job these people are paid to do.

It is often argued that large bonuses are essential to retain the highly qualified staff these companies need. We are told they are the best people in the world and they need to be rewarded to keep them working in the UK. To which I say, if they are the best people in the world how come we suffered so badly from the financial crisis? It seems they were just following the herd and investing in what everyone else was investing in and they all got burned and took us all down with them for their foolishness.

Are bonuses essential?

Let me tell you a story of success and how bonuses are not always what drives people to great achievements. For those not familiar with Formula1 motor racing let me tell you about Jenson Button.

Jenson has been racing karts and cars for twenty years. In his early career he was  racing on a shoestring budget largely supplied by his father and a few helpful sponsors. He achieved success regardless and was eventually offered a drive for the Williams F1 team where he demonstrated his skill in his first year coming 8th in the world championship.

He moved to a different team but had little success driving a car that wasn’t good enough but he had occasional flashes of brilliance but invariably the car was letting him down and denying him the chance to shine.

Next year he moved to another team where he has stayed ever since. The team was taken over by Honda who put a lot of money into the team over several years but the team struggled to provide a car good enough to win and after a few years Honda decided that because of the recession and the huge costs involved in motor racing they would pull out of F1. The team was put up for sale but no buyers could be found and the team looked like it was finished. Jenson Button could so easily have retired from the sport after ten years of struggle.

When the new year dawned there seemed little prospect of the team surviving. The team principle by now was Ross Brawn, a man with a remarkable success record for building strong teams and achieving success and he was determined to find a way to help the team survive.

Through the winter the team struggled to find the huge amounts of money needed to run a formula one team and eventually they succeeded and the team to be known as BrawnGP appeared out of the ashes of the old team. The new team needed to be run on a shoestring budget compared to previous years and they had to they laid off over two hundred staff and do anything they could to reduce costs.

Contract details are obviously confidentialbut it is rumoured that Jenson Button took a 50% pay cut to help reduce costs and stay with the team for the 2009 season. He could very likely have got a drive for another team and earned a lot more money but he wanted to achieve success for the team that he had worked so hard with for several years.

Now, Jenson Button is Formula1 World Champion. He wasn’t driven by getting big fat bonuses, he was driven by a hunger for success for himself and his team.

This is what commitment means and it isn’t earned by bonus payments. Would Jenson Button wish he had driven for another team and got a million pound bonus for every race he won this year? I don’t think so. In his travels around the globe for the race meetings this year he has paid his own fares and has apparently flown Easyjet more than once.

This is not a story of someone living the rich, flamboyant lifestyle of the rich and famous. This is a story of determination, ability and hard work. It has all paid off for him and he is a worthy champion and a credit to British sport.

So do we need to pay big bonuses to bankers and financiers to achieve success? No, we need to motivate them to want to do well for themselves and for the company they work for. Give people the opportunity to achieve success and be proud of themselves. Bonuses make people more interested in the money than they are in any loyalty to their company.

Congratulations Jenson Button, World Champion and an example to us all.

Money Magic: Seven Simple Steps to True Financial Freedom (Quick Reads)

There has been interesting news on the question of bank charges with the announcement by RBS-Natwest that they will be reducing some of their banking charges from the 1st October 2009. From that date the charges will be as follows:-

* Unpaid item fee reduced to £5 from £38 (maximum £50 per month, reduced from £114 per day)
* Paid referral fee reduced to £15 from £30 (maximum £90 per month)
* Guaranteed card payment fee reduced to £15 from £35 (maximum £90 per month, reduced from £105 per day)
* Maintenance charge reduced to £20 from £28
* Unarranged borrowing rate of interest reduced to 19.24% EAR

Announcing the moves, the new CEO of the UK Retail Bank, Brian Hartzer, said: “This is good news for customers, not least because the fees for unarranged borrowing have been an area of ongoing concern for them. As we look ahead there are many issues to consider, but we thought it was time to move this particular customer concern forward by cutting our charges.”

This is a positive move and it is interesting for several reasons. Firstly, the banks have been arguing throughout the last few years that the penalty charges they make are fair and represent the true cost of the additional work involved with dealing with them. So, we must assume from this that RBS has somehow found a way to reduce their costs significantly in relation to these items. If that is the case then the banks shareholders should be very concerned that the Bank has previously been so inefficient that it cost so much for a computer to print a letter.

An alternative view is that the bank expects to lose the case currently under appeal to the Law Lords, now known as the supreme court. It has always seemed that these charges were unfair and the banks were profiting from them and it would be a huge disappointment to millions of citizens if somehow the ruling were to say that the OFT could not rule on the fairness of bank charges. We must await the result of the Law Lords decision expected in the autumn but in the meantime this must be seen as a positive step and a recognition by RBS that their charges were too expensive and in most people’s opinion, regardless of the legal opinion, unfair.

Money Magic: Seven Simple Steps to True Financial Freedom (Quick Reads)

There are new rules released today by the FSA for the financial industry and they say they require bonuses to be more closely linked with banking results to reduce the risk of bonuses encouraging risk taking by financial company employees. The rules are aimed at reducing the risk taking that many believe was the ultimate cause of the financial crisis we all have had to suffer.

The FSA say that they believe that the bonus culture was a factor rather than the cause of the banking crisis but I suspect many will take that with a large pinch of salt. If there had been no bonus culture would we face the current crisis? Probably not because there would not have been the incentives for staff to make the deals that turned out to be so bad for the banking industry.

This leads me on to wonder if bonuses are ever good for consumers. Bonuses are usually paid to staff to encourage them to be more productive and to generate more business for the company but does this have any bearing on consumers? Yes, it means that the staff will try to make sales to customers that they might not otherwise make. The customer may not even want the product but they might be persuaded by a member of staff who knows they will get a bonus if they can make the sale.

We saw a very good example of this with the promotion of credit cards and loans. People in the banking industry were expected and required to try to sell credit cards and loans at every opportunity. Many current credit card holders only have their credit cards because of a staff member trying to boost their bonus income and many of those credit card holders will wish they had never accepted the card.

It is hard to see how bonuses ever benefit the consumer. They always add additional costs to the company and often, it seems, the bonus encourages deals that are not good business for the company. There was once a time when people worked for their salary and always tried to do their best for the company without ever seeing a sniff of a bonus. If you are an asset to a company you would hope that company would show their appreciation with a salary increase. The idea that you retain good quality staff with bonuses is ridiculous as it just emphasises that the only thing that matters is the money and there is no loyalty whatsoever but maybe in this modern era that is the basic fact of life and business. Grab what you can and have no loyalty to anyone but yourself.

Money Magic: Seven Simple Steps to True Financial Freedom (Quick Reads)