Best practice | Pay caps
“Unless there are wider changes in banks, there will still be high earners taking high risks. All the bonus cap will do is increase fixed pay at a time when pressure on pay in the sector has been downward.” Carl Sjöström, Hay Group
that far from encouraging good performance, this kind of pay is damaging, encouraging employees to focus on narrow targets - which are hard to design for most roles - rather than the wider demands of the job and the organisation.” Doubt is also cast on the motivational impact
of bonuses certainly at top levels. One study by PricewaterhouseCoopers, for example, found that the higher people climb the corporate ladder, the less incentivised they are by financial rewards. But the biggest problem with the bonus cap,
finance at Cardiff Business School. “Strong caps also lead to a misallocation of resources so, for example, it becomes more difficult to attract the best people into banking. While some may say that is a good thing and we need more talent in innovative manufacturing companies, we still need a competent, efficient banking system to kick-start the lending process. Innovative companies are also high risk and who is going to lend to them if it’s not the banks?” For some experts in remuneration, the critical
issue is not whether bonuses should be capped or not but whether bonuses and other forms of variable pay, designed ostensibly to reward performance, are effective or desirable at all. “Performance-related pay is a broken concept,”
says Luke Hildyard, head of research at the High Pay Centre (HPC). “Most of the evidence shows
says Kent Matthews, is that it only treats the symptoms of banking’s current malaise not the underlying disease. “High bonuses are an effect not a cause of excessive risk-taking by banks. It is the fact banks have been allowed to become too big to fail that has increased their risk appetite. Incentives that reward and attract high risk-takers have flowed from that. Banks design remuneration contracts to achieve their business objectives.” After the Great Crash of the 1930s and strict
regulations governing interstate banking and the separation of investment and commercial banking activities, explains Matthews, the difference between the pay of bankers and similar professionals was small. From the eighties onwards, however, that spread widened sharply. “What changed was deregulation,” he says. “It opened up a whole new way of thinking about banking. The bigger a bank got, the stronger,
“Some will do it (offset bonus caps) through higher fixed pay or increased pension contributions, but many companies are planning to invest in training and career development, healthcare and flexible working programmes.” Mark Shelton, Tower Watson
Best Execution | Summer 2013 73
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