“I will not work
any harder or any less hard in any year, in any day because someone is going to
pay me any more or less”
John Cryan, CEO Deutsche
Bank, November 2015
I
was interviewed on Radio 5Live’s Wake UpTo Money
this morning, on the subject of bankers’ bonuses. Many thanks to Adam Parsons for some good
questions, and to John Purcell, my fellow interviewee (specialist in executive
search in the banking industry), for some very perceptive comments about the
market for bankers and banking superstars.
It was quite a lengthy interview in radio terms, so I managed to get a
few points made. But of course, there is
more to be said. So, here is a brief
guide to some pros and cons of bankers’ bonuses. (I’ve blogged some of this before, but it is
worth repeating.)
Why should
bankers be paid high bonuses?
·
Because they are. There is no logic behind the current practice
of paying bankers far higher amounts than other jobs; it is just custom and
practice. The status quo is an argument in
itself. Not necessarily a good argument,
but there is, whether we like it or not, a market rate, both for their fixed
pay and for bonuses.
·
It would
be very difficult for one bank to say that pay levels were far too high and to reduce
them unilaterally – some employees and potential employees would just go
elsewhere. Not all of them, obviously –
there aren’t that many jobs – but the better ones could move easily.
·
As John
Purcell said in this morning’s interview, although there are fewer banking jobs
around, and fewer individuals seeking them, there is still a very strong demand
for the superstar individuals who can make a big difference to results. Losing those people would matter. Furthermore, as banking is a global industry, if
star performers move, this could affect not just the bank’s profits but the UK’s
reputation as a financial centre.
·
Historic
norms have desensitised bankers to smaller sums of money. If we believe that
bonuses do work then research suggests that those bonuses have to be at a
suitable level to incentivise.
· Every attempt at regulating top individuals’
pay has had unintended adverse consequences. So far, regulatory attempts to reduce bonuses have increased fixed salaries for bankers. This means that salary costs are much
less flexible for the banks, giving less scope to manage costs in a
downturn, which is not really what was needed.
Why should
bankers’ pay and bonuses be significantly lower?
·
As I said above, there is no logic
behind the current practice of paying bankers the way we do; it is just custom
and practice. Bankers just drew the
lucky number. There is no reason why
this should not change.
·
The ‘market’ for bankers’ pay, for the
pay of most executives, rarely exists.
Supply and demand, with fungible assets and transparency of prices, are
the determinants of a good market – in the market for executives we have none
of these. The mythical ‘market’ is often
just a comparison with selected peers, and the art lies in selecting the right
comparators.
·
Bonuses don’t work. Research generally shows that bonuses can
incentivise employees doing repetitive simple work, but they do not incentivise
good performance in complex, cognitive tasks. Banking is a complex, cognitive
task. This implies that the Holy Grail
of the ideal bonus plan is never going to be found.
·
Attempts to devise suitable bonuses that
will generate performance (defined in many ways) have resulted in huge
complexity in reward schemes. Often,
individuals do not fully understand all the factors that influence their
bonus. (Which itself is the subject to a
whole stream of research about why that can’t motivate.) Far worse, these complex layers of incentives
have led individuals to take on too much risk in a one-sided bet: Heads I win, Tails the company (or the
taxpayer) loses.
·
Governments implicitly underwrite the
major banks, which makes it difficult to argue that any good performance is
solely the responsibility of those managing them. The level of pay should reduce to reflect
this.
·
When news emerges of major bank
misconduct – think payment protection insurance, LIBOR manipulation or
Swiss-based tax evasion – we hear that the individuals at the top of the
organisation did not and could not know about it because it is just one small
part of the empire. Well, if it’s too big for the boss to know about the bad
things, it’s also too big for him to take credit for all the good things. ‘Too
big to fail’ could also mean ‘too big to manage’.
·
Regulation has increased in the last
couple of years to try to deal with some of these risk issues. The level of bonus has been capped as a
percentage of fixed pay (which has led to hundreds of thousands of pounds being
paid to consultants to try to define what ‘fixed’ means in regulatory terms). Bonuses are now deferred, for a period of
three to seven years. The possibility of
clawback of past bonuses has been introduced.
All potentially good ideas, all with flaws, and none yet proven to work
in practice. As IMF chief Christine
Lagarde said last year, “Regulation alone cannot solve the problem”.
·
The level of inequality in society is
growing, and there is a lot more attention paid to what is ‘fair’. Most of us
get paid a salary and turn up to do the job to the best of our ability. We don’t get big bonuses for that, it’s
expected. Why should bankers be
different?
·
Bankers’ jobs are less difficult than, to
use a clichéd example, brain surgery.
They are less risky than being in the armed forces. They are not as physically tricky as working
on some assembly lines, nor as unpleasant as, say, cleaning sewers. When you think of it in these terms, it is
embarrassing that we as a society have chosen to divide up reward in the way we
have.
So, is the level of bankers’ pay and
bonuses ever likely to reduce significantly? It's difficult. I don’t think regulation will do it, and I can’t
see any single bank being the first mover in changing pay structures. I’ll end with something I wrote in the NewYork Times a couple of years ago:
The best way to reduce bankers' pay to something more
'reasonable' (however defined) would be a clear signal by some of the
industry's top CEOs that they and their teams are refusing excessive bonuses. Pay
has two functions, it provides monetary reward, and is also a symbol of status
and achievement. A culture change could help recalibrate the symbolic impact,
perhaps in conjunction with a cap. I don't see it happening, but it is one way
to solve the problem.
------------
The podcast of the programme is downloadable here mp3 at http://open.live.bbc.co.uk/mediaselector/5/redir/version/2.0/mediaset/audio-nondrm-download/proto/http/vpid/p03g3897.mp3 Our bit starts at 08:05 and lasts to about 15:30
-------------
PS You might also like the article I wrote for
Cranfield’s journal, Management Focus,
a few years ago. Titled ‘Tackling FatCat Pay’ it has the added advantage of great pictures of fat cats!
