Saturday, May 14, 2011

Bankers and Bonuses: does size matter?

Are bankers overpaid? Maybe and maybe not. Compared to whom? I want to make an unfashionable suggestion: they should get higher bonuses - but in a different way. In stock, not in stock options. Bankers should co-own banks.
To receive bonuses in the form of stock options makes directors want to increase short-tern share value - and it rewards them when they sell them.The idea is that in this way their interests and the interest of stockholders are aligned. First, it is only half true. Second, it is only half true.
First, because the prime interest of investors is dividend, the interest of first-level speculators is share value. And the interest of second-level speculators is volatile share values. Second, because bonuses don’t align. Alignment would mean that directors get extra paid when the stock goes up, and pay back when it gets down. But they cash when things get well, and they don’t pay when things get rough. The intelligence of shareholders apparently has its limitations, just as with ordinary mortals.

Directors, especially directors of banks should get bonuses in the form of shares, shares that can only be sold when they leave the firm and not faster than 10% a year. That will tie them to the long-term success of their firms. That will align their interest much better with the shareholders - and with the personnel by the way. Employee-owned stock can be administered by a foundation that issues certificates, which may make the whole operation cost less.

It could be argued that this is less tax-avoiding. Oh my! It could be argued that it makes people dependent on their successors. Oh my! Often, directors leave after impressive feats that bring their hidden costs out in the open long after they left. The proposed solution would make people interested in having good successors. Nothing wrong with that.

Altogether, this would mean that as to bonuses, size doesn’t matter that much. It is the kind of bonus that matters.

2 comments:

  1. The issue is not about bonuses but more about the underlying philosophy of how to run a business.
    Around the early nineties the shareholders value was introduced as opposed to people value. The long term strategy of the companies were replaced by short term quarterly results, to please the shareholders. This induced the change of attitude of the managers: they did everything to reach their quarterly results. This attitude was even amplified when the bonuses were introduced. What was good for the business was changed to what was good for the managers. After that all their actions became focused on short term goals which are protecting their bonuses.
    This lead to decisions which were not in the interest of the company they are working fore since long term strategy did not matter anymore. In some cases it lead to bankruptcy of the company.
    People get used to get bonuses and after a while they think they are entitled to get a bonus.
    In short: when the focus changes from We to I the problems will start. Or spiritual: we tend to forget that we are all connected, there is no I without the other.

    Fons van den Heuvel

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  2. Shortsightedness is the issue. I have limited myself on the aspect of institutionalizing a long-term perspective. What you write about the 90s is right.But I doubt that people value was strong before that.

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