Why new rules on bankers’ bonuses won’t work

This week’s news that the EU is to exert control over the size of bankers’ bonuses has been met with a mixture of delight, worry and puzzlement says Andy Philpott.

For those who resent what they see as the selfish, every-man-for-himself attitude of the City, the news hasn’t come soon enough. Meanwhile, those concerned about the implications for a sector that is a big generator of tax and employment for the UK are the ones looking worried.

As for the puzzlement? I guess that is reserved for people like me, who think a lot about the links between people, performance and reward.

That’s because – if you are able to put aside the views you hold for and against bankers and their pay for a moment – the decision to cap reward seems not just to be a blunt instrument, but the wrong way entirely to address the problems it is trying to solve.

The first issue with this approach is that tackling pay levels doesn’t solve the real problem in banking: the issue of rewarding people for behaviour that isn’t in the long-term interest of the banks, their shareholders or their customers.

The second problem is that the way the capping deal looks set to work – by limiting bonuses to a multiple of annual earnings – is likely to weaken the ability of banks to reinforce the behaviour they need to change for the better.

We have found to our cost that incremental reward is a powerful driver of negative behaviour, but it can also drive positive behaviour. With the new deal for bankers likely to result in the setting of higher salaries in order to retain talent, the ability for organisations to drive through the behaviour change could be seriously diminished, as might the incentive for individuals to change. What’s more, when misdemeanours are discovered in the future, the ability to claw back money from salaries will be harder for organisations.

I don’t think any rational person can argue that banks don’t need reform after the damage caused to ordinary people in the past few years. Equally, there can be no doubt the issue of reward for failure needs to be addressed.

But tackling the issue of reward on its own is not the way to deliver the changes people want. It is behaviour that caused the problems in the first place, and so it is behaviour that needs to be addressed. That isn’t just a lesson for banking, but for any organisation that wants to change.

For more on the decision to cap bankers’ bonuses, see Personnel Today’s coverage.

XpertHR has a range of information and resources on pay and benefits.

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