Bankers bonuses are a self-created myth

Mar 02 2010 by Nic Paton Print This Article

In a finding that will be music to the eyes of anti-bonus politicians and regulators, but probably not so welcome in the boardrooms of Wall Street and the Square Mile, a Dutch business school says that the need to hand out vast bonuses within the banking world is a "self-created myth".

David De Cremer, professor of behavioural business ethics at Rotterdam School of Management and visiting professor at London Business School, has argued that banking senior executives do believe bonuses are important, but only for colleagues, not themselves.

We have of course already seen a number of banking CEOs fall on their swords when it comes to passing up their bonuses this year but, according to De Cremer, the idea that bonuses will automatically spur people on to perform better is a myth.

His analysis of attitudes among top-level executives in the Dutch banking sector has concluded that executives believe it is only their colleagues who are spurred into better performance by bonuses, not themselves.

"The findings of my research demonstrate that the need for giving bonuses within the banking world is a self-created myth," he said.

Although top executives were influenced by bonuses, recognised they were an important and powerful incentive and accepted them as a means of attracting top-level talent, they themselves generally preferred to do business with a different type of banker, preferably someone who put the interests of the customer first.

"The outcome of my research makes it very clear that the whole notion that bonuses are very important, as promoted by the financial sector in the past decade, is at least in part a self-created myth Ė one that claims that the intrinsic motivation of many bankers may be undermined by the absence of bonuses," said De Cremer.

Moreover, the fact so many employees were receiving bonuses created a strong impression that the term "top-level talent" was being used very loosely by many banks.

Amid a continuing atmosphere of seething public anger over bonuses it was imperative that academics stood back and examined whether the system of bonuses was everything it was cracked up to be and whether they indeed had any true value as a performance-improving tool.

In his research involving 15 top Dutch banking executives, De Cremer first concentrated on the importance of bonuses for the interviewees themselves.

The focus then shifted to how important these bonuses, in their view, were to others in the financial sector.

The findings, De Cremer argued, clearly revealed an important psychological preconception: all top executives believed bonuses were more important to others than to themselves.

"This type of bias can only imply that they regard bonuses as indispensable for recruiting much-needed top talent. It turns out that these top executives do indeed attach above-average importance to bonuses and are therefore prepared to invest heavily in them," he explained.

The final series of questions put to the executives was about the type of bank they preferred to consult for their private investments.

They were given a choice of two types of bankers, a "Banker A" driven by self-interest and financial gain and a "Banker B" who put the interest of the customer above anything else and was keen to provide good service.

Without exception, all the executives Ė somewhat hypocritically Ė opted for Banker B, while having earlier made clear that they would appoint Banker A within their own banks.

What this showed, concluded De Cremer, was a need for a much greater degree of realism about the recruitment of genuinely outstanding employees.

There also needed to be, he argued (possibly unsurprisingly), greater investment in the training of executives, managers and financial talent by the financial world within business schools and universities, as this would considerably improve the average quality of banking staff and lessen the need for excessive bonuses.