Bonus for bankers can become a malus for their business

28 januari 2010

Today’s Financial Times offers a new development with respect to bankers’ bonuses . In ‘Bosch chief criticised banks’ one of the most influential German industrialists, Bosch’s CEO Franz Fehrenbach, states that he will no longer do business with those banks that maximise bonuses. It seems to me that many business people and other clients of banks might have thought the same thing for a long time. But this is the first time that a company of such size actually threatens to take such serious measures.

The discussion on bonuses is a difficult one. In a global market it seems necessary to reward exceptional value creation and secure the inflow of talent. However, the level of bonuses and rewards for failure have outraged the general public and politicians. (So odd that some bankers still don't understand this). Thus bankers risk the ax of new regulation. Whether that will be effective is not sure. However, clear signals from the market have the potential of faster and more effective change of bonus practices.

I do not belief that bonuses are wrong by definition. However, a change of the bonus system in the financial sector is much needed. More emphasis on long term value creation, inclusion of non financial (including sustainability criteria) and claw back mechanism would be a good start. I’m sure that such measures would also come to meet the expectations of well respected bank clients.

If bankers would act swiftly and drastically, they might –to a certain extent- succeed in appeasing politicians and meeting their clients’ expectations. Changing the bonus system is crucial for avoiding market and regulatory malus. Bankers should award Franz Fehrenbach a bonus for giving them this valuable insight! Clients are valuable.

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