Banking Bonuses and the Financial Crisis

2483 WordsJun 23, 201810 Pages
The bonus culture & management incentives in banks were a key factor in the Irish and US Crisis. The system was flawed from the beginning; bankers took risks to get short term bonus, with no regard to long term consequences to the economy. Within the financial system the bonus culture is unique. The banks present a high percentage of it award based on bonus driven remuneration. For the employees of the bank it became a high percentage of their annual salary. This gave bank employees the incentive to offer risky loans and mortgages. During the boom years from the mid 90’s to 2006 in the U.S. housing market experienced a boom. During this period many mortgages were offered to people who were in the high risk category of defaulting.…show more content…
Fig3. Interrelationship between pay magnitudes, pay structures and incentives for excess risk-taking How did this happen? Most Businesses pay out bonus to their staff after review of the profit of the company is completed, however not in the banking sector, banks pay out bonus as a cost of running their business, before profits are calculated. There is also widespread criticism that bankers take far more out of the business than the shareholders who own it. Barclays recently announced it was handing £800m to shareholders, but £1.8bn to its bankers as bonuses. That imbalance is rarely the case in businesses other than banking. See Fig4 UK Bankers Bonus. Ref2 http://www.theguardian.com/business/2013/feb/28/bonuses-the-essential-guide#101. Fig4 UK Bankers Bonus Lord Turner advised after the Turner Review 2007-2008 “ financial crash blamed on the excessive bonus & risk bankers will take with investment to get this bonus with other people’s money & that full review of risk management policies was key & needed to be integrated into pay policies”. Ref1. http://www.un.org/esa/desa/papers/2012/wp115_2012.pdf Bebchuk, Cohen and Spamann (2010) document that many bank CEOs, including those of Bear Sterns and Lehman Brothers, had paid out to themselves huge payoff s prior to the crisis and that these payoff s far exceeded the amounts they lost eventually. In that regard, bank management can be said to have benefitted from short-term
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