Banking Bonuses

Financial bonuses are powerful and important incentives. New research by David De Cremer , Professor of Behavioural Business Ethics at Rotterdam School of Management, Erasmus University and Visiting Professor at London Business School, shows that top-level executives in the Dutch banking sector believe bonuses are important, but not for themselves, only for their colleagues.

According to the research executives also believe it is only their colleagues who are spurred into better performance by bonuses, and not themselves. De Cremer said: “The findings of my research demonstrate that the need for giving bonuses within the banking world is a self-created myth.”

Although top executives are influenced by bonuses and accept them as a means of attracting top-level talent, it has become clear that they prefer to do business with a different type of banker – preferably someone who puts the interests of the customer first.

De Cremer adds, “The outcome of my research makes it very clear that the whole notion that bonuses are very important, as promoted by the financial sector in the past decade, is at least in part a self-created myth – one that claims that the intrinsic motivation of many bankers may be undermined by the absence of bonuses.”

Excessive bonuses are the most frequently mentioned example of unbridled self-enrichment in the financial world, and their use has changed very little in the wake of the credit crunch. On the contrary, it is evident that a great many employees of investment banks are receiving huge pay packages, and it is argued that they are needed to bring in and retain financial top-level talent.

The fact that so many employees are receiving bonuses creates the impression that the term “top-level talent” is being used very loosely. Moreover, many Dutch people complain that employees primarily motivated by financial gains do not fit very well into their social market economy.

So is the system of bonuses everything it is cracked up to be? This question formed the starting point for Professor De Cremer in examining the true value of bonuses as a performance-improving tool.

In his research involving 15 top Dutch banking executives, De Cremer first concentrated on the importance of bonuses for the interviewees themselves. The focus then shifted to how important these bonuses, in their view, were to others in the financial sector.

The findings clearly reveal a psychological preconception: all top executives believed that bonuses were more important to others than to themselves. De Cremer says, “This type of bias can only imply that they regard bonuses as indispensable for recruiting much-needed top talent.

It turns out that these top executives do indeed attach above-average importance to bonuses and are therefore prepared to invest heavily in them.”

The final series of questions put to these executives inquired about the type of bank they preferred to consult for their private investments. They were given a choice of two types of bankers: Banker A was presented as someone driven by self-interest and financial gain, while Banker B was painted as an individual who put the interest of the customer above anything else and was keen to provide good service.

Without exception, all the executives taking part in the study opted for Banker B, while having earlier made clear that they would appoint Banker A within their own banks.

De Cremer concludes his study with a call for a much greater degree of realism about the recruitment of genuinely outstanding employees.

He also advocates greater investment in the training of executives, managers and financial talent by the financial world within business schools and universities. That would considerably improve the average quality of banking staff and lessen the need for excessive bonuses.