It's bonus time in investment banks. So what happens when you find out that instead of getting the five- or six-figure sum you were expecting, you receive nothing? We suggest that you tell yourself the following points.
The bonus culture in the financial services industry is a curious phenomenon. Very few other sectors insist on massive performance-related payments above and beyond the salary they already receive for doing their job. Some of the most talented people in the country, performing some of the most vital roles - Doctors, Generals, High Court Judges, Senior Civil Servants, Cabinet Ministers, Police and Fire Brigade Chiefs – all manage to get by on their basic salary. They don’t require an additional reward for doing a job for which they are already handsomely remunerated relative to most of the population. So beyond the narrow confines of the banking sector, and compared to highly-talented people across the economy as a whole, there is nothing unusual or shameful about not receiving a bonus
Different theories of human motivation generally put financial gain at the bottom of the list, with more mature aspirations relating to wider notions of fullfilment at the top. Abraham Maslow’s famous triangle of human needs, with health and security at its base and self-actualisation at its apex, is a classic example. Once fundamental requirements like a warm, adequately-sized home, a decent diet, perhaps a reliable form of transport have been met, happier, more mature individuals tend to gravitate towards non-material goals. Contrastingly, there’s probably some deep, almost Freudian, sense of inadequacy driving the kind of people who constantly obsess over the size of their house or car or bonus.
The effects of inequality are now well-documented, and supported by a wealth of academic evidence. The Spirit Level by Richard Wilkinson and Kate Pickett shows how, in the developed world, more unequal countries, such as Britain and the US, tend to suffer much worse social problems including obesity, teenage pregnancy, drug abuse and low social mobility, than their more equal counterparts, like Germany or the Nordic states. Similarly, Stewart Lansley, writing in the ‘Cost of Inequality’ highlights the damaging economic effects of inequality. When a tiny rich elite horde more of the country’s resources, they tend to channel it into property or other unproductive investments, whereas low and middle-income consumers spend all the money they have in the productive economy. So higher levels of inequality hinder economic growth. Research by Brian Bell and John Van Reenen from the London School of Economics shows that inequality in the UK, for example, is largely driven by high pay in the banking industry. Under that reasoning, any banker accepting a large bonus is contributing towards our biggest social and economic problems.
In addition to being more socially aware (see above) bonus refuseniks are also more cosmopolitan and worldly-wise. The Cambridge economist Ha Joon Chang notes that the culture of high pay is most pronounced in the Anglo-Saxon economies of the US and the UK. Income inequality is also worse in these countries than other comparatively prosperous economies. This is not necessarily because of higher levels of taxation. In Sweden and Germany, for example, there is no greater wealth redistribution than in the UK – these countries are more equal to begin with, because there is not the same culture of equating wealth to status or achievement. Greed and extravagant riches way beyond one’s needs are less socially acceptable, and the expectation of enormous salaries or bonuses is more muted. Anyone not getting a bonus in 2013 can assert that they have adopted a similarly cosmopolitan outlook.
World Bank Economist Branko Milovanovic reckons that an income of $34,000 puts you in the richest 1% worldwide. About 1.3 billion people survive on less than $1.25 a day, while 2.5 billion lack basic sanitation facilities – 3.4 million people, mainly children, die every year because of problems with drinking water or sanitation. Even in the UK, bankers without bonuses are likely to be doing a lot better than most people at a time of punishing austerity and stagnant economic growth. Public servants earning £21k (well below the national average) are having to undergo real terms pay cut. Low-wage earners who receive tax credits, and the unemployed or disabled who receive social security support, will also see their incomes decline. Other members of the public who depend on services effected by public spending cuts, including women’s refuges, pre-school children’s centres or public libraries are likely to have little sympathy for anyone complaining about their lack of bonus.
As the comparisons with other sectors, or other countries show, bonuses probably don’t do much to improve performance. So you don’t really need one. A number of studies have confirmed their limited impact on performance. For example, the psychologist Kenneth Thomas noted that monetary rewards only motivated those in low-skilled, menial jobs where the participants lacked intrinsic motivation, most unlike the competitive world of banking, while the consultancy firm PWC, found that executives discount conditional pay packages, effectively assuming they won’t receive a potential bonus, meaning that the impact on their behaviour is weak, particularly if the bonus is deferred or issued in the form of shares.
For the benefit of anyone that hasn’t been living on one of the moons of Jupiter over the past five years, bankers and their bonuses are not viewed enormously favourably in the eyes of the general public. Media fury at ‘fatcats’ and ‘telephone number salaries’ has reached crescendo as bonuses soar while the economy slumps and inequality levels remain at their highest for thirty years. Polling for the High Pay Commission suggests that 73% of people think that income differences in Britain are too large, while 60% think that ordinary working people do not get their fair share of the nation’s wealth. As the days grow longer, the January snows melt and bonus season comes into view, it maybe much better for your popularity to be at one with those millions of unfortunate souls outside the banking sector who won’t have an extra windfall to anticipate.
Luke Hildyard is the head of research at the High Pay Centre, an independent non-party think tank which monitors pay at the top of the income distribution.