According to Joseph Stiglitz in his book Freefall, ‘bankers (for the most part) are not born any greedier than other people’ . He mentions the flaws in compensation and bonus systems in banks, which he argues was one contributory factor to the collapse of the US and global banking sector in 2008. ‘Bonuses were based on short-term performance – not long term,’ he states, as thus bankers were effectively encouraged to take risky decisions. The world economy is still dealing with the consequences of the poor decisions taken by bankers.For example, on 31 March, 2011, Ireland’s finance minister announced what is reportedly the largest bank bail-out in history, totalling €70 billion. The debate about banker’s bonus pay continues in the media. On 19 January, 2011, The Guardian reported how Goldman Sachs’ pay as a percentage of revenue increased from 2009 to 2010. Goldman Sachs received a \($12\) billion bailout from the US Treasury in 2008. On 13 March, 2011, the same newspaper reported how the Royal Bank of Scotland, which is a nationalized bank following bailouts by the UK government, paid 300 or so staff more than £1 million, nine bankers were awarded shares worth £28 million, and the chief executive earned £7.7m. The total bonus pay for 2010 was approximately £950m, despite a loss of £1.1 billon for the year.

Questions

1 What would you change about the bonus pay of bankers/traders?

2 Can you think of any non-financial measures that might be used to supplement the profit-based performance measurements used to assess bankers?