Some people have completely missed the point and believe that the problem with bonuses lies in their size. Nothing could be further from the truth. The billions allocated to bankers as a whole based on their achievement of targets are a drop in the ocean compared to the leverage, insolvency and bankruptcy of the global banking system. These sums are probably indecent and immoral given the damage the strategies used to secure them have done to the system. But in themselves, they are sums that are far from being the cause of the accounting difficulties the financial system is currently facing. All the bonuses combined amount to nothing more than peanuts the accounting shortfalls suffered by banks around the world. Although, on reflection, publicising these insignificant sums may simply be a way of justifying regulation designed to prevent the perversion of the incentive system that throws us into the Risky Business.
So, what is the real reason for demonising and regulating these bonuses? Why have the G20, central banks and other world leaders made such an effort to control and alter these performance-related payments for global bankers? The reason is very simple: the banking strategies and policies required to secure these bonuses have proven to be lethal to the stability of the system. In order to secure a multi-million-pound bonus, the heads of various banks must take excessive and reckless risks to achieve growth figures, profits and, ultimately, success for their institutions, thereby jeopardising the stability of the banking sector as a whole, and with it the stability of the capitalist system in its entirety. The reward for success, when it comes to companies vital to the system such as banks, which are supposed to provide stability, is perverse because it jeopardises the very survival of the financial system. Thus, most senior executives at major banks did not hesitate to take far greater risks than is desirable, essentially for two reasons:
- Lack of awareness of the risk involved.
- An irresistible personal bonus.
As for our naivety, we all seemed to believe we were living in a sustainable, eternal and unassailable system. After all, just over two years ago, who could have imagined that the entire global banking system could collapse? Yet some were dismissed as mad doomsayers they did it five years ago (It’s striking to read Roach’s words again, isn’t it?). But the bankers eligible for bonuses either failed to see or chose to ignore the risks involved in leading their institutions to infinity and beyond.
Today, attempts are already being made to move towards a model that is somewhat less dangerous, though essentially just as perverse. Sarkozy will therefore try to persuade the G20 to apply bankers’ bonuses in three-year tranches, forcing them to maintain their performance throughout the three-year period if they wish to receive the bonus. This will eliminate the absurdity of a banker earning success fee with just one successful year amidst a string of poor ones. But as we have said, The bonus system remains fundamentally flawed.
When we talk about a risk-reward balance such as that found in the banking sector, performance-related pay (profit = bonus)—which is so logical and widespread in the business world—no longer applies. When we are dealing with companies With the ability to leverage assets more than 25 or 50 times, a globally interconnected financial system, and collateral that is susceptible to bubbles such as the property market, bonus payments cannot be left solely at the discretion of the institution. It is therefore inconceivable that sound and prudent risk management should be a concept alien to the bonus schemes of bank executives. For what is being put at risk is the stability of the entire system, and not merely the personal bonuses of a few executives or the institution’s business future. 
Globalisation; leverage; market monopoly (virtually no one is exempt from having some kind of connection with the financial system) or universal goodwill; or the holding of the entire population’s debt throughout their lives (even more than one), to give a few examples, make the global banking system a Reason for macro-state to ensure its stability and soundness.
As we were saying, there is now a consensus against performance-related bonuses (success fees) for bank executives. Everyone recognises the perverse nature of offering personal incentives for increases in bank profits. If the carrot we dangle in front of the donkey pulling our cart to keep it moving is too tempting, we risk snapping the axle due to excessive speed, overturning on the first bend, or fatally derailing the entire convoy. The fact is that it is not just our family or company travelling in that cart, but, in tow, the stability of the financial system as a whole, and therefore that risk must not exist. It is clear that nationalising the banking sector is a terrible solution that would lead to utter inefficiency; nothing could be further from my intention. But it is also clear that the choice of incentives must be based on criteria that go far beyond the bank’s own profit. Rewarding senior executives solely on the basis of performance, as in any other company, is reckless, inappropriate and has proven to be catastrophic. Objectives and risk management (both at the individual institution and at a systemic level) must be taken into account in the bonuses paid to bank executives, regardless of regulations.
The curious thing is that this very distortion of the bonus system – the negative effects of which we almost all agree on today – is exactly the same perverse concept for those who willingly accept performance-related bonuses for managing a personal portfolio or wealth in general. For those who pay fees based on what an adviser or manager makes them earn, the result is essentially the same: Neglecting proper risk management in pursuit of a bonus that can only be secured through substantial profits. Even so, many who condemn bankers’ bonuses continue to pay their own managers in the same way, without realising that are subject to the same mismanagement of their assets. But of course, in such cases, rather than the stability of the financial system, it is only the stability of the family’s assets that is put at risk. To each their own.