Sunday, 30th August 2015

Banker bonuses – WEF Chairman Klaus Schwab give his opinion

money-1.jpgCommercial feature - The controversy surrounding bonuses for bankers has swelled up again, with the recovery of the UK and the world economy remaining in a state of limbo.

As with any political or economic issue, it is complicated and multifaceted. There are those who argue that the bonuses make sense, and those who feel that they are insulting and disgraceful. There are at least two sides for every story, and it is worth considering both of them before choosing a side.

Arguments For Bonuses

Remuneration has always been viewed as a way of encouraging individuals to perform at their best. It makes sense in today’s economy for banks to want to hold onto their best staff in order to maximize their profits and recover from the economic crisis.

Proponents argue that bonuses allow the banks to hold onto executives that know what caused the problems in the first place. Since they were there when it happened, they are able to identify the root causes.

They also say that a “bonus” is often just a commission paid to a broker or salesman who earned a great deal of money for the bank. They argue that it doesn’t make sense to punish the staff who did their jobs correctly just because other members of the group failed to meet their end of the bargain.

Furthermore, proponents argue that a bonus is the only incentive that banks can really offer in order to attract great staff when the salaries can’t be increased and the available funds are small. Since bonuses are only given out after profits have already been accounted for by the end of the year, it makes good financial sense to cap salaries and offer bonuses rather than increasing salaries.

Arguments Against

Critics argue that the relationship between profits and bonuses seems to have been lost. A billion pounds of bonuses are being paid out when twenty billion pounds have been spent by taxpayers to bail out the bank.

They also claim that bonuses don’t work as well in government run organizations as in the private sector. With the private sector receiving government funds, the taxpayer scrutiny is something that the private banks are not used to dealing with. This kind of attention counteracts the positive effects of the incentive.

In addition to this, bonuses are said to encourage short-term, risky behavior that maximizes profits in the short term but could potentially lose money in the long run. The sub-prime mortgage disaster is an excellent example of this.

During the bull market, certain financial packages made a great deal of money for the banks in the short term, resulting in bonuses. Those same financial packages failed shortly afterward, and created the financial crisis.

Many bonuses are legally bound, so once they are set up they can’t be canceled, even when a bank is doing terribly.

Of course, as the founder of the World Economic Forum, Klaus Schwab, said in a Guardian article, “this discussion is superficial, as it doesn’t consider the essential point: the role that companies, including banks, play in society.” He claims that the primary problem has to do with the idea that companies have moved away from providing services to the public and now act only as functional entities focused only on earning profits.