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On banks and bonuses

  • 16 January 2019


One of the issues raised at the royal commission into banks was the size of salaries and bonuses paid to senior staff. Subsequent discussion has tripped lightly around the issue, perhaps out of respect for the conventional wisdom regarding proper conduct in glass houses. Public comment has been limited for the most part to proposing more precise and narrow criteria for justifying bonuses and high salaries.

The larger question is whether it is in the best interests of financial institutions and other large corporations to offer to its senior officers huge salaries and bonuses. At stake in the issue are relative justice to employees and — even more significant — the effect of this practice on the enduring prosperity of the institutions themselves.

People who support the existing patterns of remuneration often lament them in theory, but justify them because in practice they are the only way in which you can attract the best people to join and stay with your institutions. Given that those who make decisions about remuneration have often been the recipients of largesse, the pragmatic argument seems persuasive.

Its assumptions however, are problematic, the more so if the argument is true. It holds that in seeking employment, as in all other areas of economic life, people are ultimately motivated only by the financial gain that it promises. In such a world we can presume that the people best qualified and endowed to lead the organisation will be strongly so motivated. In such a world, too, we may assume that shareholders will place high returns on their capital above all other considerations. Their support for enterprises will wax and wane with their short-term profitability.

These shared assumptions will lead shareholders and boards to motivate their principal officers by offering even larger financial rewards should they achieve certain targets, primarily based on short term profit. It will be of little concern if the targets are reached by cutting staff in whom the stored wisdom of the enterprise resides or by exploitative and marginally legal dealings with clients. The only grounds for complaint about bonuses will be if the desired gain on which they rest does not eventuate.

If businesses flourished by encouraging competitive greed, this could be regarded as a great system. In reality, however, the continuity of organisations depends on the enduring commitment of key officers to their longer term flourishing and to the patient building of trust between the organisation, those