Two articles yesterday claimed that bonuses don’t work. One from Simon Caulkin in the Daily Mail and the other from Aditya Chakrabortty in the Guardian. Both cite high bonuses in the financial sector, and the subsequent catastrophic collapse of many banks, as evidence that such remuneration schemes are counterproductive.
I’m not up to date with the latest studies on remuneration systems. (When I’ve read up on it I’ll post about it.) Aditya Chakrabortty claims to have ”been through stacks of the research on bonuses” but, disappointingly, doesn’t quote any of it in support of his arguments. What I remember from when I last looked into it in any detail was that the results were inconclusive. Certain types of incentive scheme worked in certain organisations and others were completely useless. For every researcher arguing that bonuses don’t work you’ll find one that reckons they do. Much seems to depend on the context.
However, looking at the financial crisis, it appears that the remuneration schemes of the mid-2000s were a roaring success. Banks wanted their employees to make as much money in as short a time as possible. The remuneration schemes were set up to encourage them to do so. And guess what? The bankers did just that. It is almost a textbook case study of the remuneration policy driving the behaviour that the employer wanted. The bonus schemes did exactly what they said on the tin.
The financial crisis wasn’t caused by a few employees behaving badly and pushing their luck to get a bit more bonus. It was the result of business strategies pursued by the banks. They set up their remuneration schemes to encourage employees to execute these strategies and the employees behaved accordingly.
None of this is to say that huge banking bonuses are fair or moral or that they should not be curbed. But it is clear that the bonus schemes of the mid-2000s worked. Banks encouraged their employees to drive ever faster and so that’s what they did. By the time they discovered that they were driving towards a cliff edge it was too late.