# Breaking out of the banking bonus cycle Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2021-12-16 Category: BANKING Category URL: https://financedigest.com/category/banking Meta Title: Bankers' Bonuses: A Short-Term Blunder in Financial Meta Description: Explore the detrimental effects of bankers' bonuses on sustainable growth and why banks should prioritise long-term planning over short-term gains. URL: https://financedigest.com/breaking-out-of-the-banking-bonus-cyclehtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/istock-910730068-1736836552454-compressed.jpg) _By_ **_Brian Holden,_** _Global Director at SAS UK & Ireland_ The rest of society hates bankers’ bonuses—and banks should too. The bonus cycle weakens the business by prioritising short-term profit over sustainable growth. [Bankers’ bonuses](https://www.financedigest.com/banker-bonuses-go-from-boom-to-bust-in-jarring-reversal.html "Banker bonuses go from boom to bust in jarring reversal") are a regular target for media outrage, resentment, and calls for reform. Yet what most members of the public don’t realise is that the first [victims of the bonus culture are the banks](https://www.financedigest.com/how-can-banks-defend-the-latest-generation-of-scam-victims.html "How can banks defend the latest generation of scam victims?") themselves. A bank is a company with [shareholders and a board](https://www.financedigest.com/hsbc-board-recommends-shareholders-vote-against-spin-off-resolution.html "HSBC board recommends shareholders vote against spin-off resolution") of directors, just like any other. It is not in the interests of either the board or the [shareholders to take a significant bite out of the bank’s profits to pay](https://www.financedigest.com/unicredit-shareholders-urged-to-reject-ceo-orcels-pay-rise.html "UniCredit shareholders urged to reject CEO Orcel’s pay rise") large bonuses to employees. They only do so because they have no choice if they want to retain [top talent](https://www.financedigest.com/5-steps-hiring-top-talent-youre-just-start.html "5 steps to hiring top talent when you’re just a start-up "). **Why** [bonuses aren’t working](https://www.financedigest.com/leading-london-advertising-agency-launches-bitcoin-bonus-scheme-encouraging-staff-to-use-artificial-intelligence-in-creative-work.html "Leading London Advertising Agency Launches ‘Bitcoin Bonus’ Scheme, Encouraging Staff To Use Artificial Intelligence In Creative Work") In fact, the [annual bonus cycle is a merry-go-round that banks](https://www.financedigest.com/banks-learn-how-to-profit-from-the-transaction-banking-gold-rush-at-annual-igtb-oxford-school.html "Banks learn how to profit from the transaction banking gold rush at annual iGTB Oxford School") would be glad to get off, because they know it’s making them sick. The current bonus model creates a perverse incentive for employees to focus solely on the short term: the game is to maximise this year’s results and [leave the future](https://www.financedigest.com/putins-victory-day-speech-leaves-no-clue-on-future-escalation.html "Putin’s Victory Day speech leaves no clue on future escalation") to look after itself. This might be ok if economic crises always started in the first month of each financial [year and could be wrapped up comfortably in time](https://www.financedigest.com/30-years-of-excel-lence-time-to-move-on.html "30 YEARS OF EXCEL-LENCE: TIME TO MOVE ON?") for the annual report. But real life doesn’t lend itself to such neat arrangements. The COVID pandemic is a prime example. When the crisis first hit, the Bank of [England](https://www.financedigest.com/bank-of-england-fines-former-tsb-executive-over-2018-it-failure.html "Bank of England fines former TSB executive over 2018 IT failure") told banks to suspend dividends and bonuses. However, the pressure gradually built over the course of the [year and the industry](https://www.financedigest.com/how-open-banking-will-change-the-banking-industry-in-the-next-10-years.html "How Open Banking will change the banking industry in the next 10 years") lobbied to allow a pay-out, arguing that cases were falling and the economy was bouncing back, so there was no need to be over-cautious. Almost as soon as the money had gone out of the business, COVID [hit with its second and third wave](https://www.financedigest.com/cash-loving-germans-fret-over-exploding-atms-as-cross-border-crime-wave-hits.html "Cash-loving Germans fret over exploding ATMs as cross-border crime wave hits"). Thousands of companies and millions of families found themselves in financial jeopardy, [putting the banks’ pandemic response strategy back](https://www.financedigest.com/putting-the-human-touch-back-into-banking-magazine.html "“Putting the human touch back into banking”-Magazine") to square one. [Funds that could have been reserved to help bolster UK plc and society were diverted back into this cycle](https://www.financedigest.com/oiling-the-wheels-for-a-smooth-funding-cycle.html "OILING THE WHEELS FOR A SMOOTH FUNDING CYCLE") that largely benefits individuals. This isn’t just [bad for customers, it’s bad for the banks](https://www.financedigest.com/alpha-bank-to-sell-bad-loan-portfolio-to-fortress-and-davidson-kempner.html "Alpha Bank to sell bad loan portfolio to Fortress and Davidson Kempner") themselves. Any attempt at long-term [planning for sustainable growth in the future is derailed by the overwhelming pressure to focus on the short-term](https://www.financedigest.com/in-planning-for-today-dont-lose-sight-of-tomorrow-avoiding-short-termism.html "In planning for today, don’t lose sight of tomorrow – avoiding short-termism") gain whatever the consequences. **Fail to measure, fail to improve** So why is it like this? Partly, it’s a failure of measurement. While [banks are enormously rich in data](https://www.financedigest.com/open-data-represents-the-biggest-challenge-to-banks-in-a-generation.html "Open data represents the biggest challenge to banks in a generation") about all aspects of their operations, most of them fail to take advantage of it. As a result, instead of analysing performance in a holistic manner, they’re forced to rely on a small set of relatively crude [metrics to track how the business](https://www.financedigest.com/5-fx-metrics-your-business-should-be-tracking.html "5 FX METRICS YOUR BUSINESS SHOULD BE TRACKING") is doing. If you can only measure performance in the short term, such as the past 12 months, and along a single axis, such as total fee or [interest income](https://www.financedigest.com/abn-amros-q3-profit-jumps-as-interest-income-recovers.html "ABN Amro’s Q3 profit jumps as interest income recovers"), then you can only reward your employees based on that limited snapshot of their total contribution to the business. Anyone who prioritises some other aspect of their job—such as longer-term [thinking to lay the groundwork for future](https://www.financedigest.com/the-pull-of-the-past-1-in-5-keep-items-they-think-will-be-valuable-in-the-future.html "The pull of the past! 1 in 5 keep items they think will be valuable in the future") prosperity—is unlikely to prosper, because their efforts won’t even be visible to the powers that be. [**Fair returns for society**](https://www.financedigest.com/supporting-a-fair-and-resilient-society-by-protecting-access-to-cash.html "Supporting a fair and resilient society by protecting access to cash ") If banks want to be a force for good, the first step is to take a more multidimensional approach to measuring, understanding, and [rewarding performance](https://www.financedigest.com/atelier-residents-reap-rewards-of-top-performing-new-town.html "Atelier Residents Reap Rewards Of Top Performing New Town"). For example, why not build measures such as customer satisfaction and the protection of [vulnerable customers into overall performance metrics for each line of business](https://www.financedigest.com/why-your-business-is-vulnerable-to-supplier-fraud.html "Why Your Business is Vulnerable to Supplier Fraud")? Why not reward those who are trying to build a more equitable [banking system—one that prioritises sustainable growth and economic stability](https://www.financedigest.com/banking-stability-worries-go-behind-closed-doors-at-imf-world-bank-meetings.html "Banking stability worries go behind closed doors at IMF-World Bank meetings") for UK plc, instead of just maximising this year’s returns? --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---