Performance-related pay and banking do not mix. (2017)

“Many of the (financial) scandals we are still wading through stem from poor incentives…”

Financial Times Inside Business, 13 August 2017
Jonathan Ford, City editor of the Financial Times

“In the 10 years since the financial crisis, much of the debate about bankers’ bonuses has fixated on the scale and structure of these controversial payments. What is less discussed is whether they serve any beneficial purpose

“Many of the scandals we are still wading through stem from poor incentives. Take payment protection insurance, which has so far cost banks a staggering £35bn. For years, head offices offered financial inducements to staff to flog this frequently unnecessary product.”

“….As Andy Haldane of the Bank of England points out, there are few ways for banks to bolster their returns to shareholders. One is to loosen underwriting standards and thus to increase the riskiness of the assets they invest in. The other is to squeeze the amount of regulatory capital they set against the investments they make. The uplifts provided by either expedient are temporary, as puffed-up profits ultimately revert to the mean. Just look at Lloyds TSB, which went from the world’s most valuable bank in 1998 to one requiring a state bailout a decade later.

“Offering incentives to encourage such volatility seems merely obtuse.”

Access the full article here: Performance-related pay and banking do not mix.