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What we should be asking leaders of financial institutions January 27, 2010

Posted by Alan Yu in Leadership.
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For those of us who don’t benefit much from bank bonuses, it is easy to show revulsion against them, especially when they are estimated by the Wall Street Journal to be US$145 billion in 2009, or by my calculation as much as 50% to 100% of profit.

 

Bonuses are not harmful by nature.  They are harmful only when the objectives they are designed to achieve, and by corollary the behaviour they encourage, are not in the public interest.

 

In his article in the New York Times, Paul Krugman quotes Jamie Dimon, CEO of JP Morgan Chase as saying that a financial crisis is something that “happens every five to seven years. We shouldn’t be surprised.”  Krugman also quotes Lloyd Blankfein, Goldman Sachs’ chief, as saying that the financial crisis was “a hurricane nobody could have predicted”.

 

In light of their remarks, Messrs Dimon and Blankfein have probably not designed the bonus system in their institutions to maintain financial stability and preserve the value of their customers’ life savings.

 

Bank leaders commonly justify bonus payments in spite of the financial meltdown on grounds of remaining competitive.  Those that reward behaviour other than pursuit of profit for shareholders are bound to lose talent.  Worse still, they cannot give the institutions they lead meaning to their contribution other than profit.

 

People often join organizations for money, but they leave mostly for other reasons.  To retain talent, bank leaders need to provide a clear vision on how to prevent the next financial meltdown.  They need to give more meaning than just monetary reward to their followers.  They should show moral character in taking more responsibility for the crisis.  Above all they need to understand fully what behaviour the bonuses they pay promote, and make adjustments accordingly.  Unless they do so, we can be sure that the next crisis is just around the corner.

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