Why do banks pay bonuses? The underlying motivation
behind them is to reward bank employees when their efforts produce profits for
the bank. These bonuses can vary from thousands to millions of pounds and can
be paid to bankers in cash or also in less obvious forms such as shares or
pension funds. The allocation of such bonuses is decided by the bank’s
remuneration committee.
However within the financial world how do
banks make more money? They take more risks! Bonuses are seen by many as short
term incentives which can trigger excessive risk taking by banks. These
incentives cloud good judgement in investment bankers, and rather than making them
better bankers, it instills greed. This is a fault which helped contribute to
the recent financial crisis. This leads us to wonder why banks pay these bonuses
which encourage risk taking? The main explanation behind this is the competition
for managerial talent; due to rising competition banks need to offer bonuses to
be able to maintain and attract the best staff.
“Banks operate in a world where their star talent is apt to jump between different groups, whenever a bigger pay-packet appears, with scant regard for corporate loyalty or employment contracts. As one banker says ‘These bonuses are crazy; we all know that. But we don’t know how to stop paying them without losing our best staff.’ ”(Tett, 2009)
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