Bonus obsession makes bankers miserable

The news that large banks are continuing to offer large bonuses has caused a new round of anger among the public. RBS, which is in dire straits, hopes to give some of its top bankers bonus worth 200% of their pay despite making a PS8 billion loss.

You might wonder if bankers and the organizations that employ them have learned from the financial crises. A more intriguing question is why banks are so devoted to bonuses despite evidence that shows they often cause more harm than good.

Many answers are offered to this question, but the one that is most interesting comes from a former trader. Sam Polk, writing in the New York Times, claims that bankers are addicted to bonuses. He says that in his last year as a banking executive, he was “addicted” to money.

Polk explains candidly how, after college, he was able to find a job at a prestigious banking institution through sheer tenacity. He describes how his salary skyrocketed, but he became jealous of those who received even bigger bonuses. Polk describes his “change from being delighted at my first bonus of $40,000 to being disappointed in my second-year at the hedge fund when I was only paid $1.5 million”.

Polk was inspired by Philip Slater’s 1980 book wealth addiction to make sense of the astonishing shift in expectations. Slater describes in this book how “MoneyThink”, as he calls it, had become the dominant way of thinking for North American society at that time.

He said that those with significant wealth have similar traits to addicts. They cannot live without the drug they choose. They view the drug as a natural behavior or a human weakness. People with similar preferences surround them. Even the thought of withdrawal can cause anxiety. Complex justifications and explanations are given to justify and explain the addiction.

The substance may make users feel happy at first, but it can ultimately undermine their happiness. In the pursuit of the drug they choose, users can neglect and even destroy their personal relationships. Many studies published in the past three decades have largely supported Slater’s claim that large monetary incentives can be “addictive”.

Keep up with your neighbours

First, we need to think about the social comparison process. We compare the reward we received with rewards we have previously received and with other people’s achievements.

A study of Fortune 500 CEOs’ salaries found that their salaries could be explained better by comparison with their peers than their underlying performance. Bankers are also disappointed when their bonuses don’t compare to those in their industry or their previous performance. It can be that a bonus they would have been happy to receive a few short years ago is now viewed as a slight against their character because their peers have received more rewards.

This social comparison has the unfortunate side effect of creating a ” Bonus Culture“, which increases rewards in all industries, regardless of performance. The standard that bankers use to determine whether they are being fairly rewarded is their peers. This can lead to an arms race in which those who are perceived as “top talent” are rewarded.

It would be justified if this increased performance, but it doesn’t appear to. It only increases bonuses for the small elite.

Healthy Balance?

Banks are unable to provide their employees with other rewards because they are focused on increasing bonuses. Work-life balance, personal development, and other issues are given less attention. You may believe that the prize is your greatest reward, even though you didn’t think so at first.

The other factors that motivate people, such as the nature and purpose of the work, the intellectual challenge, the status, the purpose, etc., are ” crowded.” People may have been motivated by “intrinsic reasons” (such as enjoyment or challenge) to perform a task, but now they only want large “extrinsic rewards” (such as bonuses). In the end, many bankers will focus their efforts on the dividends they may receive at the year’s end.

A study of hundreds of bankers over nine years tracked the devastating impact of this focus on bankers’ lives. Young bankers initially saw the 120-hour work week, high pressure, and lack of outside life as fair tradeoffs for the rewards they received. After about three years, some bankers began to feel a sense of malaise or lack of purpose. Many people found that their bodies started to degenerate, resulting in serious health issues. Food, alcohol, drugs, and pornography are all addictive.

The bankers were not worried. All these experiences, they explained, were a price to pay for the big rewards.

Is it possible to stop the bonus habit, given these negative effects? Maybe. Some evidence suggests that things are changing. Many of the largest European banks have tried to wean bankers off bonuses. Some never even started the habit. Svenska Handelsbanken in Sweden, for example, doesn’t pay dividends to its employees but has consistently outperformed the competition for decades.

There will undoubtedly be unintended consequences of breaking the habit of bonuses. It is a lifestyle choice that banks and bankers would be wise to take into consideration.