Essay about Bonuses and Investment Bankers

The Royal Bank of Scotland - just like many other banks and businesses - paid out its managers considerable bonuses for their performances. Managers at RBS started maximising their bonuses by aggressive actions such as take overs and investing in complex financial products. These actions caused the profits of RBS to grow rapidly, which meant high bonuses for the managers. These actions, however, also meant the stability and financial safety of RBS on the long-term got worse and worse. This was not a problem for the managers as they had already earned their bonuses. A different bonus structure probably would have prevented the reckless actions of the RBS managers.

In the case presented both AFLAC and L.L. Bean had their own distinctive ways of utilizing their products in order to enhance the total compensation for its employees. The factor that has deterred more employees away from their current employer is that of benefit packages, and reward systems. As stated by () “compensation affects a person economically, sociologically, and psychologically. For this reason, mishandling compensation issues is likely to have a strong negative impact on employees and, ultimately, on the firm’s performance” (p.313). Many felt just a bump in pay wasn’t enough to substantiate their hard work or the efforts that the performance efforts provided to their organization. As stated by () “the right total rewards system a blend of monetary and non-monetary

Compensation systems can take on many forms, all of which have positives and negatives related to it. However, certain components are noted to be determinants of solid compensation plans. One agreement of a solid compensation system is the use of incentives. “Clearly a successful companies set objectives that will provide incentives to increase profitability” (Needles & Powers, 2011). Incentive bonuses should be measures that the company finds important to long-term growth. According to Needles & Powers (2011) the most successful companies long term focused on profitability measures. For large for-profit firms, compensation programs should offer stock options. The interweaving between the market value of a company’s stock and company’s performance both motivate and increase compensation to employees As the market value of the stock goes up, the difference between the option price and the market price grows, which increases the amount of compensation” (Needles & Powers, 2011). Conclusively, a compensation plan should serve all stakeholders, be simple, group employees properly, reflect company culture and values, and be flexible (Davis & Hardy, 1999; The Basics of a Compensation Program).

I appreciate that the banking sector is vital to the strong health and growth of our nation’s economy and directly affects each of us, however, many of these financial institutions took the funds and immediately paid out senior executive bonuses instead of using the money to back loans to the public. These executive bonuses were public record and created a massive outcry from the taxpayers, but even this seemingly greedy use of power was overlooked by the federal and state governments.

There could be a few options Dax and Mark could incorporate, but the employees may not like them. Hours could be lessened, benefits could be reduced, or insurance premiums could be raised. Any three of these ideas could make any employee angry just to receive their yearly bonus. However, It seems many companies are cutting back on their yearly bonuses because of loss, cutbacks, and the slow economy. Mark and Dex could hold a meeting explaining the issue and what is going on inside the company then give the employees options to choose from so they feel they have a say in what happens to their pay. Having an option makes an employee

7. Option compensation will continue to be a critical component of compensation for executives as it simplistically aligns the executives’ pay to shareholder value in its simplest sense. I don’t believe that options compensation is the primary driver of behavior when things shift from the legal to the illegal. As with most senior executives in industry, ego is a huge driver in individual behavior. Compensation is important, but the recognition of your performance is sometimes even more important. We have created a performance driven culture without the necessary control framework for people to operate within. One minute you are doing a great job, the next you have crossed an imaginary line. The frameworks don’t do enough to quantify behavior as legal and illegal leaving inconsistent rules for organizations to operate within. How does Enron compare to the subprime mortgage debacle, or to Steve Jobs backdating options. There remains too much room for interpretation.

The Stock Market Crash played a major role in bank failures. After the crash, people were indifferent about the stability of banks, so they all began taking out their savings. Banks no longer had the currency to stay open. For those who did not take this

2.Shareholders want high long-term profits. Managers want job security and wonderful perks and amenities. Since risk and return tend to be positively related, managers may wish to avoid risks that shareholders want the managers to undertake. To encourage managers to take on risks, compensation committees can place a greater weight of their compensation on long-term incentives such as stock, options to buy stock, and bonus based on surpassing the performance of comparable firms over several years. When all

| Implication: Increased risk of inflated sales linked to higher compensation. Response: Auditors should increase evidence for

The 2008 financial crisis had multiple causes but the most outstanding to me is the passing of the Gramm–Leach–Bliley Act. This act repealed Glass – Steagall which removed the safeguards that came between commercial and investment banks. It destroyed regulation between the two and gave unprecedented “innovation” which allowed millions of Americans to purchase homes they couldn’t really afford. This created the American housing bubble that eventually popped do to citizens being unable to pay for their new homes. The intial burst of the housing bubble resulted in the foreclosure of 860,000 homes in 2008. Another entity at fault for the recession would be the credit rating companies. They provided the means to the consumers to take out mortgages

The economic downfall of 2008 illustrates the impact of unbridled corporate pay structures on our economy. Securities fraud, committed as a result of incentive packages offered to executives to create quick profits, had a detrimental effect on the overall economy. As observed during the Bank and Loan bust of 1989, CEOs take greater risks when offered stock options in their compensation packages. The 2008 Financial crisis, sparked by subprime mortgage market and hedge funds, was driven by banking executives making short term risks that served detrimental to stockholders in the long run. Furthermore, many compensation packages offered Golden Parachute clauses with no claw backs to both performing and underperforming executives.

The banking crisis of the late 2000s, often called the Great Recession, is labelled by many economists as the worst financial crisis since the Great Depression. Its effect on the markets around the world can still be felt. Many countries suffered a drop in GDP, small or even negative growth, bankrupting businesses and rise in unemployment. The welfare cost that society had to paid lead to an obvious question: ‘Who’s to blame?’ The fingers are pointed to the United States of America, as it is obvious that this is where the crisis began, but who exactly is responsible? Many people believe that the banks are the only ones that are guilty, but this is just not true. The crisis was really a systematic failure, in which many problems in the

The Recession of 2008 was caused by two major faults: the use of subprime lending and changes in banking culture leaning towards self interest within the banking industry.

The second compensation package was not well designed nor did it help define what the corporate strategy would be. For a second time the compensation package focused on maximizing shareholder’s wealth and didn’t take into consideration the stakeholder’s position at all. Dunlap’s package was deeply weighted in company options ($3.75M). In fact it was weighted heavier than before. The stock grants were

Executives and those responsible for misdeeds should have been subject to significant clawbacks of compensation. If the reason they misbehaved and took inappropriate risks was to raise compensation, losing that compensation would be an appropriate punishment.