Sunday, February 15, 2009

Bankers' Bonuses

There is a lot of debate in the news at the moment about whether the employees of RBS and other large (and now) Government-owned banks should receive bonuses. In all the furore it seems to me that no one has taken the time to explain the remuneration of most employees in large organisations, and this is leading to anger on all sides:

1. Non-bankers are livid that "bonuses" are to be paid to employees of organisations that are losing money

2. Bankers or other city types point out that most employees of these banks are expecting a bonus as part of their remuniation package, as they were not responsible for the spectacular failings of the investment arms of their banks.

These two perspectives are not incompatible! Let me explain. Aside from executive level, all bank staff will be paid a basic salary. For anyone working directly for the bank, this salary will be quite acceptable, thank-you very much. Even PAs and basic IT support admins will be on 40k or more.

Then, as part of their contract, there will be a bonus eligibility, which will be expressed as a percentage. This may be 10-20% or so, the exact number relating to their position, what was negotiated as part of their contract etc.

Each year, a corporate performance reward scheme will be put in place. This will set out how much of the of this agreed % will relate to personal target achievement, how much will relate to corporate success, and there may be other factors in the mix too.

So if we take 10% as bonus potential, it may be that 6% is personal, 3% corporate and 1% if the bank achieves some specific goal. Thus if the employee completes all of his objectives for the year, agreed at the beginning and reviewed at the end, he will get that 6%. If the company makes large profits, he will get the 3%, and the 1% will come if the bank breaks into the new target market, or opens a certain number of new branches.

The huge fuss in the media focusses purely on employees getting "bonuses". What all will agree, I suspect, is that the corporate part (the 4% in my example) of their bonus should not be paid. Individually though, they still deserve the portion of their "bonus" associated with delivering on their personal objectives (or not as the case may be!). Indeed contractually I suspect one could not not pay this part of their package.

Yet another example of the media blowing a story out of proportion to sell more print. Does it help us as a society though? Probably not.


Richard Denny said...

Bonuses paid to bankers have attracted hysterical abuse not only by an aggrieved public but also by journalistic comments.

Now let’s get real. bonuses. Big bonuses paid to directors and departmental heads should be forgone. The chiefs are at fault not the Indians as they are paid to carry out orders and deliver. They are incentivised to perform and over-perform and they of course should be rewarded. When I educate directors and managers on the subject of incentives and performance enhancement I start by laying the foundation “you will get more of whatever you reward and recognise” so be careful in what you do recognise and reward. If you reward or recognise long hours of work you will get people doing just that but not necessarily enhanced performance.

A few years ago I was asked to sort out a problem with a major parcel carrier. They were experiencing a high level of customer complaint of non-delivery with too many parcels returned to the depots. A bright young executive put in an incentive programme for the drivers. If the parcels were not returned to the depot – the drivers earned more money. You can guess what happened - a good incentive but rewarding the wrong result

This is exactly what has happened to the chiefs in the banking fraternity. The right incentive but for the wrong result. The vast majority of the Indians who have performed well and who have had little or no impact on the mess that the banks are now in should be getting their bonuses.

Sam Crawley said...

My point was that there doesn't seem to be clarity in the media regarding the distinction between the vast majority of the employees and their performance-related pay, and the evil word of the month, "bonuses".