Published : 10 years ago, on 01/08/2014

“The plan to get tough on bankers pay shows that the Bank of England is willing to go beyond soft talk and address hard measures such as pay. The threat of clawing back bankers bonuses will defend the banks but demotivate bankers.

Andre Spicer

One of biggest causes of the financial crisis were large bonuses for short term results. This meant bankers would take bets which would pay off in the short term but go bad in the longer term. When this happened bankers would walk away with huge bonuses, while the banks and ultimately the public were left to carry the losses. New measures to be recommended by the Bank of England tomorrow will see rewards being threatened with potential claw back for up to six years. This comes on top of banks already deferring bonuses between three and five years. The upside is bankers are likely to be conservative in their decision making. If their own bonus is at stake they are likely to avoid cutting corners and take a longer term perspective. However, the extremely long pay-off period is likely to mean large rewards cease to act as motivators. This is partially down to human psychology: a small reward today is seen as more valuable than a large reward in the future. Bankers will be genuinely concerned that change they have no control over which happened during a long period of time could lead to their bonus being withdrawn. We have to remember that the average shelf-life of many companies is decreasing by the year.

This could result in unexpected outcomes: if a large bonus stretched out over years is not seen as satisfactory, then bankers might demand more. Another result would be bankers going in search of greener pastures elsewhere in foreign banks or the shadow banking sector. A final result is that banks will need to start thinking in more rounded ways about how they motivate staff. Instead of just relying on pay, they will have to offer more healthy working environments, opportunity for development and allow people to bring their values to work. It could spell an end to the Faustian pact in banking.

These hard measure will do far more to change the banks than asking bankers to take an oath. Even in very cohesive professions, taking an oath only has limited impact. Research has found that most medics who take an oath say it only had a limited effect on their decision-making. When making tough decisions they are more likely to turn to values in their private life such as religion or experience with a mentor. The main benefit of taking an oath they reported was it made them feel good.”

Commenting on the £217m fine for Lloyds Banking Group, Dr Peter Hahn of Cass Business School said:

Peter Hahn

“Lloyds conduct is appalling and reprehensible. Yet once again the cost falls on the taxpayer rather than the individuals involved. Taxpayers have a right to know who has sullied the reputations of Lloyds, the City of London and the UK as a financial centre. And, more importantly who managed these people? Twenty-two individuals were allegedly involved. My guess is the names have been withheld as their repugnant behaviour might amount to unlawful conduct. But such vague disclosure is bad for a City trying to redeem itself. It is only when the individuals are exposed and forced to explain themselves publicly that standards in the City will be raised. This doesn’t just apply to the 22 but to some very senior people who chose not to understand these activities either through laziness and incompetence at best, or complicity at the worst. Such fines levied against banks seem ever more a type of shareholder tax than a means of deterring or punishing wrongdoing. It would seem every shareholder – and that is us – has a right to know who has caused this expense. And if they have left Lloyds, what are they doing now?”