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Only the small violins playing for a cohort of investment bankers at HSBC were fired without a bonus on the day expected to be said for the size of the annual payment. The timing looks cold blooded. HSBC had a reputation as one of the more benevolent employers in a sector not known for its tactile human resource policy. But the new CEO, George Elhederry, is on a cost-cutting mission. He has consolidated several units, dismantling bank mergers and acquisition recommendations and dismantling stock capital market operations outside Asia and the Middle East.
Most bankers consider fluctuating wages to be a permanent part of their compensation. In fact, it’s not a bonus. While such incentives are linked to performance goals, repetitive bonuses are also an accepted way of seduction that connects ambitious bankers to employers or seduces flaws in competition. A cool eye analysis suggests that unless there was a contractual obligation to pay the bonus, HSBC didn’t have to spend money to stick to the banker they were planning to fire.
If Elhedery reminded his peers that the “discretionary” bonuses were in fact discretionary, he may have even favored the sector as a whole. Reducing bonuses should be the first cost-cutting step for banks under pressure. Such a decision is easier to reverse than wholesale redundancy.
The ghosts of the great financial crisis still plague the incentive settings by investment banks. In 2008, the main issue was one-way rewards that encouraged risk-taking among traders, structured financial experts and salespeople. A disastrous systemic outcome that has rebelled against the economic system and taxpayers, not the banks and their staff, following the collapse of the opaque products they created and invested in.
Now, bonuses have returned as a key component of bankers’ compensation. The UK has removed the bonus “Cap” by exercising its freedom to diverge from the rules of the post-EU crisis after Brexit, feeling disgusted by the bank boss. In reality, CAP has been effective in boosting fixed wages, reducing bank flexibility, and adjusting overhead at bad times. The UK-based bank can now promise a higher double fixed wage as an incentive. This is a change that could in itself improve the appeal of London as a financial centre.
Banks can still wear themselves out against other post-crisis rules, such as long vesting periods of inventory-based compensation, but their structures correctly limit the possibility of abuse and new systematic crises.
Bank bonus seasons were once a festival of ugly self-promotion, betrayal and content. These days it’s not bureaucratic and emotional. That’s positive. But money is still talking. Research shows that the benefits of non-financiality often stop motivating staff, but the daily work of bankers revolves around creating and trading pounds, dollars and euros. They are used to measure relative performance and rewards in financial terms.
In areas such as M&A and Capital acquisition, bonus-encouraged animal spirit releases are welcome. If proper trading and initial public offerings are encouraged, it can even contribute to overall competitiveness and growth by margins. If that means enriching the bankers who bring such a business, leaving people with low performance for several years without bonuses, that’s it. After all, for all bankers who were fired on the bonus issue date, there is another person who waited for payments to reach their bank account. As the New Testament says, those who live by the sword will die from the sword.
