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Are bonuses to blame for the credit blow-out?

Are the bumper bonuses of self-serving bankers behind the credit nastiness?

Yes, if you believe the musings of Times columnist Patrick Hosking. He cites the massive golden goodbyes of Chuck Prince (19.5m) and Stan O’Neal (77.8m) as merely the tip of the iceberg.

The annual bonus cycle, embedded in the investment banking culture from top to bottom, serves the interest of the employees not the company, according to Pat’s world view.

If your actions lead to good performance for three years and a nose-dive on the fourth, the motivational carrot has already been munched, so what does the carrot-consuming banker care?

“Bank employees have an incentive to take positions or structure investment products that usually offer good returns but very occasionally blow up badly,” says Hoskings.

He goes on to suggest that bankers should only be shown the money when the value of their investments has been irreversibly achieved for shareholders.

So… do bankers’ mistakes show they’re myopic megalomaniacs who structure products with one eye on the bonus payout? Or are they merely fallible human beings who made a few mistakes? And what alternatives are there to the current payment structure anyway? Your thoughts please…

Comments (3)

  1. There is no alternative to bonuses, or none that anyone one would dare try and impose. Delay gratification for three years based on long term performance? There’d be no one left to pay.

  2. Of course there would be someone left to pay -somebody would come and do the job, it’s just that the culture would change (dramatically, perhaps, yes).

  3. Of course it is the excessive bonus culture, resulting in an asymetric risk profile that benefits the employees/directors, and damages shareholders and clients once the excessive risks taken to get the bonus come home to roost.

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