Business Insider

Bonuses for banking, finance executives sometimes backfire

Banks and other financial institutions bathe in the competitive environment to obtain top-notch executives. Maximizing profits and shareholder returns contribute to the desire for competitive bonuses tied to financial-performance measures.

There are several downsides to the bonuses. The organizational lust to provide extravagant bonuses might motivate executives to go out on a limb to boost returns. Before the 2008 crash, there was plenty of risky behavior with the help of $250,000-and-up bonuses. What goes up to make tons of money will often go down to reality.

Financial measures such as net profits and return on investment dominate bonuses. Should executives also be measured by how well they treat their employees? Stockholders are important stakeholders, but employees are too. Sometimes a rotten executive might get short-term financial results but also long-term problems, because nobody can stand being near the monster. Even though some key employees may be paid above competitive rates, key employee turnover can significantly destabilize the company’s operations through the loss of strategic and transactional memory and talent. Not everything comes down to numbers when people are involved.

If the bonuses are based on one year’s effort, the first year may be great but at the expense of the next three. This is especially true when the executive leaves for greener pastures after the first year.

Banks tend to use a “universal banking model” in which each branch employee can be a cashier and customer-service representative. Though the gross pay is a bit higher for the additional roles, that pay might be low relative to bank executive net pay with the bonuses. Is the ratio between lower-level and executive-level pay fair? It is challenging to determine how much increased profits occur as a result of executive decisions or the cumulative decisions of the branch employees with additional roles.

Given greater regulatory pressures to limit bonuses, especially in the global banking industry, one strategy is to provide a greater salary without the bonuses to the executives. The immediate need for significant financial growth might not motivate strictly salaried executives as much. However, the industry is trending toward steady financial improvement rather than wild swings as occurred in the “Roaring 2008s.”

Gundars Kaupins is a professor of management in the College of Business and Economics at Boise State University. This column appears in the Aug. 17-Sept. 20, 2016, edition of the Idaho Statesman’s Business Insider magazine. Click here for the e-edition (subscription required).