Why the bonus cap won’t make a scrap of difference

There have been some fascinating pieces in Joris Luyendijk’s Voices of Finance series, Earlier this week, he published an interview with a former head of HR at an investment bank.

For the past year I have been trying to get banking staff working in human resources to talk to me. The inspiration was this revealing interview about what it’s like to fire people. It proved very, very hard to find other people in human resources to speak to this blog, perhaps because it falls to them to fire bankers for secretly speaking to journalists?

He should have asked me. I know a couple of people who might have been prepared to spill the beans for the price of a few drinks.

Anyway, the interview is a must-read. Kilian Wawoe, formerly of ABN Amro, starts off, unsurprisingly, on the subject of bonuses:

People ask, when will bankers have enough? But it’s not about the money. It’s a highly addictive status game. Pay marks your status in the organisation. This is why there is no saturation point.

“I remember giving a €2m bonus to a banker. It was mostly in options but still. His first question: ‘How much is my co-worker getting?’.

Spot on. This is what a lot of people don’t get about the banking culture. It’s not about what you can buy with the money, it’s about the status that the money conveys. The numbers in your pay packet tell you and, more importantly, everyone else, where you are in the social hierarchy. They are the equivalent of pips on your shoulder or leaves on your coronet.

Which is why curbing bankers’ pay misses the point. Conventional wisdom says that high bonuses were among the main causes of the banking crisis, although some studies have cast doubt on this. But even they were, it wasn’t the size of the bonuses that mattered, it was the size relative to everyone else’s. Failed banks HBOS, Northern Rock and Bradford and Bingley were not among the highest bonus payers in the industry (bonuses are barely mentioned in the parliamentary report on the HBOS collapse) but they still managed to create aggressive, sales-led cultures where high risk-taking became the norm.

In sales-led cultures, and especially in banking, people compare themselves to others around them. It’s what the person doing a similar role or sitting at the next desk is earning that is really important. Where do you stand relative to the people you see every day? It doesn’t matter whether the bonuses are in thousands or millions, it’s all about relativity. You could pay bankers in jelly babies and they would still be down at Corney and Barrow every week comparing the size of their packets.

“That’s Giles Farquharson-Smythe. He’s a 2,000 jelly baby man.”

“What? He’s a complete twat! First thing tomorrow, I’m going in and telling them I want 2,500.”

Here is Kilian Wawoe again:

Banking is a game and bonuses are the prize, like medals for athletes. Bankers want to compete, and will continue to do so even after we alter the playing field, for instance by drastically cutting or even abolishing their bonuses.

He’s right. Whatever the EU bonus cap is supposed to be for, it is unlikely to make much difference to the behaviour of bankers. There are still some things that need to be done to make banks safer but this isn’t one of them.

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4 Responses to Why the bonus cap won’t make a scrap of difference

  1. Pingback: Why the bonus cap won’t make a scrap of difference - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Selznak says:

    Not sure about this.

    First, I think it’s important to consider not just overall pay, but bonuses as a reflection of salary. If your long-term remuneration is the same, it could make a difference whether your bonus is 20% of your base salary, or 200% of your base salary.

    The banker on a 200% bonus is more motivated to take risks. This is partly because he can buy a lot more stuff if the risk pays off.

    But even if he’s getting paid in jelly beans, in terms of competing for the status measured in beans, he’s still more incentivised to take risks. The guy on a 20% jelly bean bonus can still afford to be more cautious: if the risk doesn’t pay off, he’s still not down by that much relative to his peers. Whether they’re competing for status or money, the bonus-to-base ratio is still important.

    Second, if you take a disastrous risk and you cause enormous harm to your bank and the wider economy, what you primarily lose is status. If what you’re gaining is just status, you can balance those more fairly. The guy who blows up the bank and forfeits his bonus is no worse off in terms of money than the guy who takes no risks and forfeits his bonus. But if you change the system to make it all about status, the guy who blows up the bank is a lot worse off i status terms than the guy who takes no risks.

    Third, bankers don’t live completely in a bubble of other bankers, though they get close. They probably still have a certain contact with old college or school friends, even if it’s just five minutes checking Facebook while waiting for a taxi. If their bonuses make a big difference to their status relative to non-bankers, that’s another incentive to take big risks in pursuing bonuses.

  3. Luis Enrique says:

    I am sure there’s a lot of truth to this, but wouldn’t you expect the effect to have something to do with the magnitude of the bonus? I mean people might still fight for status if performance was rewarded with gold stars, but I’d expect them to fight harder for markers of status denominated in millions of pounds.

    However, perhaps once you get into big numbers, the numbers don’t matter much. The effect of a bonus cap on behaviour – just moving to from obscenely large numbers to slightly less obscene numbers – could be zero.

  4. I’d agree that a bonus cap isn’t the solution. But its good currency for politics.

    What stuck with me from Joris’s piece was the idea of the bonus culture creating a ‘rules based morality’. It think bonus culture may enforce/incentivise ‘rules based morality’ but it doesn’t create it. That has to do with something much deeper, – perhaps its its a consequence rationality itself?

    This idea of ‘rules based morality’ clicked in my head with an interview with Louise Mensch I read yesterday. She was talking about talking US citizenship after she had sworn an oath to the Queen as an MP. This is her how she reconciles it:

    – “However, to become a US citizen, Mensch must state she will “absolutely and entirely renounce and abjure all allegiance and fidelity to any foreign prince, potentate, state or sovereignty, of whom or which I have heretofore been a subject or citizen”.

    “Having parsed the words very carefully,” Mensch said, “they call for me to renounce my allegiance to any ‘prince, potentate, state or sovereignty’, and since Her Majesty is none such, I do not regard them as being treacherous.

    “If it said ‘King or Queen’ I would have more difficulty. So as written, I feel I can swear the oath with a good conscience,” she said.”
    (from http://www.theguardian.com/politics/2013/sep/22/louise-mensch-us-citizenship)

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