Monday View: How banks can prosper - stop paying bonuses
Monday view: How banks can prosper - stop paying bonuses
Ever since Michael Douglas, as the Wall Street mercenary Gordon Gekko, taught us that 'greed, for lack of a better word, is good' the terms banks and bonuses have been going hand in hand.
In the current debate about their unholy marriage, public opinion is appalled by the fact that banks that have received billions of taxpayers' money are handing out similar amounts in bonuses to their employees. Weren't bonuses one of the main causes of the credit crunch?
Bankers shoot back, arguing that bonuses are essential for running their banks: they are needed to attract and keep talent, and the government as a shareholder in these banks will ultimately benefit because 'greed works'.
In addition, plenty of banks that suffered badly did not have any bonus culture. As a bank, you could not do much worse than most of Germany's publicsector Landesbanks.
Similarly, there is no evidence supporting the bankers' argument that you cannot run a bank without bonuses.
The one large European bank that has weathered the credit crunch well does not have any bonuses.
Svenska Handelsbanken, the Swedish bank that has recently opened many branches in Britain, is one of the biggest winners of the current crisis.
It didn't need government support and is still making a lot of money for its owners. Its shares are the best performers in the banking sector since the start of the credit crunch.
Handelsbanken was the only bank that survived the Swedish banking crisis in the early 1990s in good shape so it should be a prime witness on good banking. Nobody in Handelsbanken's branches and management team - not even the chief executive - gets a bonus.
The reason for doing the unthinkable - run a bank with no bonuses - is the belief that employees are best motivated by having a job they enjoy.
The father of Handelsbanken's system, former CEO Jan Wallander, explained that people will appreciate having clear goals, entrepreneurial freedom and an appealing career perspective.
In practice that means that Handelsbanken bankers have a lot more discretion about how to do their job (the fun bit).
Hence no need for bonuses, which Wallander thought merely succeed in making employees unhappy because your bonus will always be smaller than your colleague's. This system has been in place with no fundamental modification since the early 1970s.
With the seemingly socialist principle of no bonuses, Handelsbanken turns out to be the most free-market bank. It has never made a loss and is more profitable than its competitors; its shareholders have not lost their shirts, and the government did not have to bail it out. So much for the bankers' argument that you cannot run a bank without bonuses.
SO WHY do most other banks defend their bonus culture? One reason is that it is a bit like asking turkeys to vote for Christmas: investment banks routinely pay out half or more of their total revenues to their employees who have thus very little incentive to stop this system.
Of course, this is extremely costly - bonuses effectively help bankers cream off profits before they can go to shareholders.
Instead of being necessary for creating shareholder value, bonuses do exactly the opposite.
Wallander's views on honest hard work and job satisfaction may be oldfashioned. But his principles still work rather well even with hard-nosed bankers. And they are a lot cheaper for shareholders.
Niels Kroner is the author of A Blueprint for Better Banking - Svenska Handelsbanken and a proven model for post-crash banking (Harriman House, £55)
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