On banks and bonuses



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.

Australian $5, $10 and $20 notes.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 working with it, those that they serve, their shareholders and the society of which they are part.

In unfashionable terms it requires that people are motivated by love of the enterprise and of those within it and by pride in giving it a shape that will benefit people in generations beyond their own. It requires of the leaders of the organisation an altruism that goes far beyond the desire for wealth and the status that goes with it.


"The good of any enduring enterprise rests on the unquantifiable strengths of the relationships that comprise it. These are built on love from which profit is a product."


If you are looking for such leaders, the last persons you would seek are those whose primary interest is the level of remuneration compared with other organisations. You would rather look for people impressed by the integrity and attentiveness that characterise all its relationship and the desire to improve it at all levels so that it serves better clients, workers, suppliers, shareholders and the wider community. You would want people attracted by the challenge and satisfaction of giving themselves fully to the enterprise for reasonable remuneration.

In such an enterprises there might be bonuses, but they would be understood in the old fashioned sense of bountifulness. They would be an unmerited gift shared by all participants in response to good fortune, and given as an expression of gratitude for sharing in a common work.

Bonuses dependent on performance present two difficulties in good organisations. The first is that people wholeheartedly committed to the welfare of the organisation and to the people whose relationships comprise it would rightly be insulted by the implication that they would give more of themselves to their work if gilded carrots were dangled before their noses.

The second difficulty is evident in the proposals to reform the bonus system made by hard-nosed share-holders. They argue that if they are to be a cost-effective appeal to greed, they must be based on quantifiable criteria based on profitability. The good of any enduring enterprise, however, rests on the unquantifiable strengths of the relationships that comprise it. These are built on love from which profit is a product. In companies that are durable, then, bonuses must be a gift and not a transaction.

From these arguments it follows that chief officers of enterprises should be paid a salary commensurate with their responsibilities and skills, with the remuneration of other employees and with other people with high responsibilities in society. They would certainly not be paid more than the prime minister, one would think. And bonuses based on performance would be dumped.

These suggestions may be derided as destructive of value. But are the existing doctrine and practices based on systematic greed any less so?



Andrew HamiltonAndrew Hamilton is consulting editor of Eureka Street.

Topic tags: Andrew Hamilton, banking royal commission



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Existing comments

Agree with Andrew Hamilton The salaries and bonuses paid to the likes of the big 4 banks' directors,executive team etc are outrageous Especially in the current climate For one of the banks to pay 108% of a bonus when that bank was being criticised for its practices is extraordinary Most of these people are just holding the reins They are not generating additional capital And show no remorse for their mishandling of shareholders funds An occasional apology would not go astray The Government must legislate to limit reward Moving the decimal point would be a good start Then there are the cultural and related issues which the banks dont appear to have started to address They have betrayed our trust A good example of why you dont give people monopolies They have a long way to go to regain our trust and dont appear to have commenced that journey

Peter H | 17 January 2019  

"..chief officers of enterprises should be paid … commensurate with their responsibilities and skills …" "They would certainly not be paid more than the prime minister" - and definitely not more than a nurse, a school teacher, a fire fighter, a policeman, an Emergency Centre doctor, a farmer, a paramedic and a host of others. Parasites feed off the life blood of others to their own advantage and the disadvantage of the others - a reasonable description of the fat cats of banking "enterprise" as revealed by the royal commission.

john frawley | 17 January 2019  

I couldn’t agree more! The current salary and bonus structure is obscene and totally disregards the contribution and goodwill of rank and file workers who actually produce the results.

Ann | 17 January 2019  

This is symptomatic of an even broader problem. According to Jeffrey Sachs the current net worth of the 10 richest individuals on the planet is $720 billion. Since the year 2000, billionaires wealth has increased 7 times and the number of billionaires has increased 5 times in past 20 years. The rich live with impunity whilst poor countries cannot afford to provide basic education and health care for all of their citizens. At the same time governments in wealthy countries continue to provide tax relief for the rich and tax evasion and tax avoidance is widespread. Inequality is an underlying cause of many of the world's problems yet we are reluctant to address it.

Brian Bond | 17 January 2019  

Well said, Andy. If the basis of our life is about acquisition of money and the benefits that flow from that (to us) then we reap a poor reward. I shouldn't speak too loftily though as it is difficult for me to bypass a shoe store! It is when money becomes the all that difficulties arise. A number of businesses now provide their employees with opportunities to volunteer. CEOs participate in fundraising for the homeless by sleeping 'rough' and the arts would be much poorer but for the generosity of wealthy patrons. So, there is hope.

Pam | 18 January 2019  

its like this, the bosses get richer the employees get sacked and the pensioners get bugger all !

maryellen flynn | 18 January 2019  

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