Blog Sedes » Why Bank-managers’ Bonuses at all?

Jan 31 2012

Why Bank-managers’ Bonuses at all?

I am struggling with a conceptual challenge.  While the issue rages in the press and parliaments about how large the bonuses should be for banking managers, I must express my lack of comprehension about why they should expect bonuses at all.

 My problem – my argument – does not resort to the usual “they have done a wretched job of it” genre that swirls around us (as true as this may be).  My issue goes right to the very foundation of the whole concept.

 The pro-bonus argument is that the banks need to encourage their decision-makers to remain at their post, making the awesome decisions about how to tweak the system to squeeze out the largest drop of return – rather than flee to another bank (and bonus scheme) to do the same.  In other words, these managers need to receive additional carrots (beyond their normal salaries) to… do their job.

 Let us consider an airline pilot.  Upon completing a flight successfully – “yes, I found the destination airport, yes, I landed the plane, yes, all passengers got off the plane, and yes, the aircraft is still in one piece” – does this pilot expect a bonus for doing his job?  … for doing what is expected of him and for doing what he is already paid to do?

 If the pilot expects more, how about a bus driver? 

 “But banking decisions,” say the pro-bonus voices, “require extraordinary, bold imagination, careful planning, and risk evaluation.”  Attention please – so does teaching a classroom of ten-year old children.  So does fighting a fire in the building where the banker makes his home.  And so do most of the jobs that most people have, to one degree or another.

 Here’s another important thing… when most people fail in their job (i.e., the food is burnt and can’t be served – the letter got sent too late, the deadline was missed and the client went to another firm) they can expect to lose their job – especially in a world that is witnessing an ever-growing pool of willing (i.e., unemployed) labor.  This is the “stick” of the carrot/stick dyad.  Why is it that in the banking industry we see only the carrot encouraging managers to do their job well – especially in this world where anybody should be delighted to have any job?  The pilot, the bus driver, the teacher, the fire fighter, the cook, and the secretary are all working at the stick end of the dyad.  What happens if all of these people start to expect – indeed, demand – additional carrots?  The obvious and unhesitating answer is this:  they would all be replaced by eager substitutes, of course, because the world shows everybody else the stick – bank managers standing unassailably and imperiously apart from “everybody else.”

 So my conceptual uncertainty is this:  why does the banking industry operate only with carrots (huge carrots!) while the rest of the world operates with the ubiquitous and time-tested stick?  Why are there no sticks for bankers, and no carrots for all the rest of the world?  Why are bankers SPECIAL?  Moreover, why do bankers REMAIN special despite the clear evidence that they have collectively done a wretched job, and propelled the welfare of the global community toward the maw of the abyss?

 And still, the discussion is about the size and shape of their carrots.  Would it not be more appropriate to consider the size and shape of their sticks?

 An even better discussion would not even allude to carrots or sticks, and in a world of contracting labor supply and growing unemployment, I cannot understand why anyone (except salespersons, a different situation) should even expect bonuses – or why anyone would consider handing them out (other than motivated through transparent greed and collusion, as is the case in the banking industry, I am sorry to say).

 Be happy – be grateful – that you have a job.  This is good advice even for bankers… especially for bankers… and it should be enough.

4 comentários até agora

4 Comentários para “Why Bank-managers’ Bonuses at all?”

  1. Paulo Sáa 31 Jan 2012 as 14:38

    Another good argument is made by professor Nassim Nicholas Taleb.

  2. Jorge Bravoa 03 Fev 2012 as 21:39

    A big stick! And no carrot, are well come!

  3. Anunesa 07 Fev 2012 as 20:59

    Big bonuses are not exclusive of the Banking sector. They are usual in major anglo-saxon governance schemes and find their support in the assumption that markets are eficient and transparent.
    But, offcourse, they are not.

  4. vbma 11 Fev 2012 as 18:47

    Why this debate in a time where
    there are no bonuses and
    no bank profits, either!?