Bankers’ remuneration is perceived amongst the core recession triggers, which lured top bankers to engage into socially wasteful investments. Society perceives bonuses as the main drivers of “greed and irresponsibly short-sighted behavior” (pp. 1).
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From an economic point of view, the central critiques about bonuses are concerned with risk-taking and short-term orientation. Nonetheless, it is noteworthy that the design of the overall compensation package appears to have generated bankers’ myopia rather than the bonus system per se. In fact, most banks now concur that, preceding the crisis, their systems were excessively short-sighted, and are currently striving to base rewards on more sustainable performance criteria such as average growth rates and volumes across longer sampling periods (Gehrig & Menkhoff, 2009). Bonuses have stirred widespread aversion feelings because of their asymmetric payoff structure which invites risk-taking by bankers. As such, should the risky investment have succeeded, the manager would have been granted a hefty compensation; whereas even in the unfavourable scenario, he still satisfied with a comfortable fixed salary incurring no further repercussions. Put differently, a bonus-based compensation package fails to penalise accordingly the various outcomes of jeopardising investments and consequently encourages them (Gehrig & Menkhoff, 2009). Remuneration is defined as the payment that generally comprises the base salary topped with any bonuses or other economic benefits which an employee or executive receives during employment in exchange for professional services. This term often refers to the total compensation which includes the base salary plus shares or share options, bonuses, pension benefits, and other perks or forms of compensation (Investopedia, 2011). Thus, remuneration can be divided into fixed based pay (payments or benefits not depending on any criteria) or variable (whereby additional payments or benefits are function of performance or various contractual agreements such as depending on sales, profits, return on assets). The above are correlated with the output of the accounting system but may also reward in line with market price of the firm’s shares. Both these components may include monetary payments or benefits (such as cash, shares, options, pension contributions) or non-monetary benefits such as health insurance, discounts, fringe benefits or special allowances for car, mobile phone (CEBS, 2010). Regulatory bodies, (i.e. G20, Committee of European Banking Supervisors), seem to concur that the inappropriate remuneration structures of some financial institutions have been a contributory factor towards the failure of individual financial institutions and systemic problems in the European Union Member States and worldwide. Remuneration policies that offered incentives and encouraged risk-taking above a certain tolerable degree at institution level undermined sound and effective risk management and exacerbated such behaviour. It was admitted that excessive remuneration in the banking industry fuelled a risk appetite disproportionate with the loss-absorption capacity of the sector (CEBS, 2010). The remuneration of bankers situates at the very centre of moral outrage succeeding the financial crisis.
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