The End of Big-Bonus Culture?

Do big bonuses have anything more than a temporary PR problem? Or is something more fundamental happening? David Williams investigates.

Things aren't looking good for big bonuses. Attacked from every side, they have become a lightening rod for criticism of everything from bankers to short-termism, excessive risk-taking and corporate and even public-sector greed. 

The problem with big bonuses is that they are both easy to understand and easy to criticise. While criticism of high salaries has certainly increased during the financial crisis, it appears at times as though opponents to big bonus culture had very little intellectual ground on which to base themselves, in recent years. Then, further along the pay scale, we find stock options. These however can often be so complex that they are more or less opaque to everyone except the company that is setting them. Bonuses are very different: their simplicity means that everyone understands that they ought to be related to performance.

This apparent transparency of purpose has created enormous difficulties for a financial sector that has become used to regarding big bonuses as an inevitable element of the compensation culture. Big bonuses have two specific vulnerabilities. First, it is easy to argue that they should not be paid to decision-makers in any bank or company that is in receipt of bailout money from the taxpayer; because, patently, these companies were run badly. Governmental decisions to limit or change compensation packages in these newly state-controlled companies inevitably, therefore, create attitudes and set standards that have ramifications in the world beyond.

The second area of vulnerability concerns the recovery in the financial sector and its relationship to the policy of quantitative easing – in which governments create liquidity by buying securities such as government bonds from the banks. Many argue that this has created an artificial, taxpayer-backed recovery and that bank bonuses have not therefore been genuinely earned. This concern, that private profits are being derived from public money, has now spread beyond the financial sector and into the public services. For example, civil servants in the UK's Ministry of Defence were pilloried in November for receiving bonuses when front-line soldiers did not.

So is the negative attitude towards big bonuses likely to be temporary? The first point to make about the long-term outlook for bonuses is that they are just too useful a mechanism to remain out of favour for long. Tom Murphy is former group vice president at the Kroger company, the largest retail grocer in the US, where he was responsible for human resources and labor relations, and primary contact with the board of directors’ compensation committee. He is currently a Markley Visiting Professor at Miami University's Farmer School of Business.

“Bonuses are too ingrained at every level to be abolished,” he argues. “They affect the performance of everyone from the bank teller to the CEO, and they are particularly useful in times of uncertainty when employers want a lot of flexibility in respect to their payroll.”

The second consideration is political. Certainly, there is a lot of public anger at the moment; and, given the level of consumer debt and the habit for borrowers to blame lenders for their predicament, it is unlikely that the good times are going to return quickly enough to quell that anger. It therefore seems likely that politicians who articulate and represent this anger will attract a following, and that mainstream political leaders will need to talk tough on financial-sector bonuses in order to head off any loss of votes to more extreme parties. To some extent this is happening already, but, despite the noise, it is unlikely that anything draconian will happen. In the West, the fundamental argument that it is not the state's role to dictate the mechanism by which a private company chooses to compensate its staff remains unassailable.