News that many of the large banks will continue to pay large bonuses has sparked off another round of public anger. Even the beleaguered RBS hopes to offer some of its top bankers bonuses worth 200% of pay, despite the bank making an £8 billion loss.
This continued attachment to big bonuses might lead you to ask whether bankers, and the organisations which employ them, have learned anything from the financial crisis. But a more beguiling question is why bankers remain so attached to bonuses, despite the significant evidence that they often cause more harm than good.
There are many answers to this question on offer, but one of the most intriguing comes from an ex-trader. Writing in the New York Times, Sam Polk claims the reason bankers can’t let go of bonuses is because they are addicted to them. He explains how in his final year as a banker he “wanted more money for exactly the same reason an alcoholic needs another drink: I was addicted”.
Polk candidly explains how after college he found a job in a prestigious bank through sheer tenacity, how he saw his remuneration sky-rocket, but rapidly became envious of the even larger bonuses paid to those around him. He describes how he had “gone from being thrilled at my first bonus – $40,000 – to being disappointed when, in my second year at the hedge fund, I was paid ‘only’ $1.5 million”.
To make sense of this astounding shift in expectations, Polk found inspiration in Philip Slater’s 1980 book Wealth Addiction. In this book, Slater described how what he called “MoneyThink” had come to dominate North American society of his time.
He argued that people with significant wealth show similar characteristics to addicts: they cannot go without their drug of choice. They see the use of it as natural or maybe a human frailty. They surround themselves with people with similar predilections. Even the prospect of withdrawal brings great fits of anxiety, and complex justifications are used to explain and justify the addiction.
Users think the substance makes them happy, but ultimately it undermines a real sense of happiness in their lives. They become single minded in the pursuit of their chosen drug, often neglecting and even destroying personal relationships and other important things in the process. In the three decades since Wealth Addiction, many studies have been published which broadly support Slater’s claims about the potentially “addictive” and damaging effects which the use of large monetary rewards can have on employees.
Keeping up with the neighbours
The first thing to consider is the process of social comparison. When we receive a reward, we try to make sense of how valuable it is by comparing it with how well we were rewarded in the past and, perhaps more crucially, with how well others did.
For instance, a study of the pay of Fortune 500 CEOs found their salaries were better explained through comparison and pegging with their peers rather than underlying performance. Similarly bankers feel disappointed if their bonuses do not compare well to others in the industry, or with their own earlier performance. This can mean a bonus many would have been quite happy with a few years ago is treated as being a slight on their character if their peers are given higher rewards or if they have received higher rewards themselves in the past.
A nasty side effect of such social comparison is that it creates a “bonus culture” which drives up rewards across the industry, irrespective of performance. Each banker wants to feel he or she is justly rewarded, and the standard which they measure this against is their peers. The result can be an arms race to reward those perceived to be the “top talent”.
This would might be justifiable if it increased the performance of firms, but it does not appear to. All it does is drive up bonuses for a small elite.
The constant push for bigger bonuses leads banks to neglect other incentives which they might use to reward their staff. Less attention is paid to issues such as work-life balance and personal development. Being constantly told by your peers and the bank that your most important reward for your long hours is your bonus can lead you to believe them – even if you did not think this to begin with.
A major side effect is that the other possible aspects which typically motivate people to work such as the nature of the task itself, intellectual challenge, status, purpose and so on get “crowded out”. While people may have originally been motivated to do a task for softer “intrinsic” reasons (such as for enjoyment or the challenge), now they will only do it in return for large “extrinsic” rewards (such as bonuses). The end result is that the central thing that many bankers focus on when trying to justify their job is the large bonuses they might receive at the end of the year.
A nine-year study of hundreds of bankers tracked the disastrous impact this focus had on the bankers’ lives. Initially, young bankers saw the extreme schedule (120 hours a week), high pressure and loss of any outside life as a fair trade-off for the significant rewards they received. But after about three years, many began to develop a deep sense of malaise and lack of purpose. Many found their bodies began to break down, developing serious health problems. Addictive relationships to food, drink, drugs and pornography were common.
But the bankers themselves weren’t worried: all these experiences were explained as a trade-off for the large rewards.
Given these harmful effects, is it possible to kick the bonus habit? Maybe. There is some evidence things are beginning to change, and many of the large European banks have indeed tried to ease bankers away from bonuses. Others never took up the habit in the first place. Sweden’s Svenska Handelsbanken, for instance, does not pay its employees bonuses and has outperformed its competitors for decades.
Clearly there will be some unintended consequences to breaking off the addiction to bonuses. But it is a lifestyle decision banks, and bankers, would do well to consider.