How Effective are Bankers Bonuses - Assignment Example

HOW EFFECTIVE ARE BANKERS’ BONUSES 1 Write the given research question here How effective are Bankers bonuses 2 Expand on and define the terms in the research question. Identify the main topic in the question and the specific focus of that topic. Note down the conceptual area/s of the Dewey System you might expect to find the main topic in the research question (75-150 words) Bankers’ bonuses are money paid to bank workers at the end of each financial year. They are paid to motivate employees and reward them during that financial year for helping the bank earn profits. Further, payment models differ in that some banks may calculate its employee bonus in respect to past service or payment of bonus may be held back or paid in the following events such as continuing employment or coming profitability. Bankers’ bonuses are effective in that it positively affects bankers’ behaviour. The positive side of bankers’ bonuses can be recognised when studied from sustainable objectives, goals, and performance perspective, not the amount of bonus that bankers receive at the end of the financial year. 1.3 Make a bulleted list of keywords and search strings which you feel will generate results in the hunt for information. Add to this list as your search progresses and you identify other keywords. Bankers’ bonuses Hedge Funds Mutual funds Risk-taking Performance Reward 1.4 Include here any relevant research from monographs on the shelves of the RC library (relevant information from a single monographic source should be paraphrased/summarised in 150-250 words but you may include more than one monographic source if available) Include end-of-text Harvard references. The financial crisis that hit the world has been blamed on bankers’ bonuses. Bankers’ were accused of engaging in social wasteful investment at the expense of the economy. Most people perceive bonuses as an irresponsible, wasteful, and bad behavior. This should not be the case because bonuses are paid based on employees’ behavior and management has no control over it. The main purpose of introducing bankers’ bonuses in financial institutions was to motivate and reward good behavior and performance. It is clear that bankers’ bonuses do affect behaviors of bankers and traders in positive manner. However, the matter about the effect of bankers’ bonuses is more complicated if not rationally understood. For example, many people think that bankers’ bonuses bring risk to the banks by bankers and fund managers because of their payment structure. In such a case, it is argued that if the risky investment pays, bankers and fund managers are rewarded big amount of money and if it does not succeed, they still enjoy their normal salary. This simply implies that bankers’ bonuses pay does not discourage recognition of uncertain investments. Contrary to this, bankers’ bonuses are effective to financial institutions, given that financial motivation in investment decisions tend to be more profitable. For instance, in 1996 to 2000 during the technology bubble, hedge fund managers ripped the benefits of their risky investment by engaging in perilous investments. A bonus compensation package offers a powerful motivation for reputational purpose. It is very risky for fund managers to engage in technology bubble because they might make losses if the bubble is moving forward. Therefore, taking such an investment decision may be understood as bad management by people. If fund managers were not motivated for such risks, they would not risk joining the herd. This is what happened to hedge funds in the United States of America. Mutual fund managers also applied the contrarian strategy during the technology bubble. Their decision was rational since it was long term. It is noticeable that mutual fund managers had a strong financial desire to take uncertain decision against the herding performance of the current market because they knew they could easily trade off their reputational risks against financial risks. Thus, bonus based mutual packages repaired the market by imposing correct market prices and ended the technology bubble. This explains how bankers’ bonuses have succeeded in the United States. Incentives in the mutual funds’ contract motivated managers to withdraw from unprofitable businesses during the technology bubble that destabilized markets. These funds decreased managers’ efforts of holding their bubble stocks. 1.4.1 Insert here scanned copies of the relevant pages used to make the summaries in 1.4 Nagel 2004, p. 58 1.5 Include here relevant research from research papers in journals using the library databases (each named group member to contribute a paraphrased summary [100-150 words] of 2 research papers within the library databases. For each source, author name, date, title, title of journal and numeration should be clearly indicated through an end-of- text Harvard reference. Bankers’ bonuses are useful to financial institutions because of the following: i. Bankers’ bonuses are effective instruments in directing bankers’ and managers behaviors ii. They are a good form of compensation packages to reward good behavior and motivate employees to work hard. iii. Bankers’ compensation packages are designed in line with company’s goals and objectives. iv. If fund managers and bankers’ are not given bonuses, they might leave the institutions and that means the banks will make losses. 1.5.1 Insert here copies/screenshots of the relevant pages from which summaries were made in 1.5 (these should be clearly cross-referenced) Saez & Grubber 2012, P 1-23 1.6 Include here relevant research from Proquest sources (each named group member to contribute a paraphrased summary [100-150 words] of one newspaper article. For each source, author, date,, title of newspaper should be clearly indicated through an end-of- text Harvard reference) The nature of banking activities implies that profits are volatile in that at some point, the bank can make losses. In business like banking where profits are volatile, there is need to motivate workers and reward them. Therefore, performance of financial institutions relies on talents and skills of individuals who need to be rewarded to perform well. It is rational that individuals make profits for the banks by performing well and making wise decisions. Giving bonuses to bankers’ will motivate them to work hard and perform better. 1.6.1 Insert here copies/screenshots of the relevant pages from which summaries were made in 1.6 (these should be clearly cross-referenced) Patgiri & Dass 2008, P 1. 1.7 Include here any relevant research from textbook sources on the shelves of the library (relevant information from a single textbook source should be paraphrased/summarised in 150-250 words but you may include more than one monographic source if available) Include end-of-text Harvard references. In countries like Germany, United States of America, Switzerland and across the Atlantic, bankers’ bonuses have impacted positively on investment behaviors of banks. Compensation packages for managers and bankers are not related to risk taking but to high performance. More so, they motivate fund managers to base their decisions on fundamental information. Compensation packages, especially bonuses for bankers’ and managers, are viewed to improve their rewards because they relate pay with performance. For instance, in production companies, compensation packages are paid for workers past service. Therefore, workers will do everything possible to produce positive outputs. 1.7.1 Insert here scanned copies of the relevant pages used to make the summaries in 1.7 Menkhoff 2009, P 70-72. 1.8 Include here any relevant research from websites (relevant information from a single website source should be paraphrased/summarised in 100-150 words but you may include more than one website). Include end-of-text Harvard references and state why you feel each website is a reliable source. Bankers’ bonuses in financial markets induce risk-taking behaviors because risk- taking decision is vital in producing high outputs. This practice is encouraged in Banking Corporation because it is the main reason to motivate performance. Those who criticise bankers’ bonuses are concerned with short-term implication of some decisions such as risk taking. Financial institutions are trying to adjust their reward system to have a more sustainable performance criterion such as prolonged sampling periods and average growth rates for their banks. 1.8.1 Insert here scanned copies of the relevant pages used to make the summaries in 1.8 Saez & Grubber 2012, P 1-23 Gregg, Tonks & Jewel, 2011. 1.9 Include here any relevant additional information from audio or visual media (relevant information from, for example, a radio or TV programme should be paraphrased/summarised in 100-150 words but you may include more than one source). Include end-of-text Harvard references. Bonuses to bankers’ and fund managers is equity based meaning that these bonuses had three to five years to mature, therefore, the time span for the recipient was fading as bonuses accumulated. By the end of the vesting period, some employees had accumulated large sums of money. Majority of bankers’ prefer taking short-term risks to increase their bonuses. On the contrary, bankers’ bonuses need to be regulated to decrease the risks they can create to the banking sector. References Coates, J 2012, The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust, New York: Penguin Press. Coggan, P 2011, Paper Promises: How Money Works and What Happens When It Doesnt, Virginia: Allen Lane. Glen, A, 2012, Financial Times Guide to the Financial Markets, New York: FT Press. Gregg, P, Tonks, I & Jewel, S 2011, Executive Pay and Performance: Did Bankers’ Bonuses Cause the Crisis? International Review of Finance 10. Hamel, G 2012, What Matters Now: How to Win in a World of Relentless Change, Ferocious Competition, and Unstoppable Innovation, New York: Jossey-Bass. Menkhoff, L 2009, Bonus Payments and Fund managers Behavior: CEPR 7118. Nagel, S 2004, Hedge Funds and Technology Bubble, Journal of finance 58, 2013. Patgiri, R & Dass, M 2008, Mutual Funds and Bubbles: The surprising role of Contractual incentives. Financial studies, 21:1, 2008. Rochet, J. C 2008, Microeconomics of Banking, Michigan: The MIT Press. Saez, E & Gruber, J 2002, The Elasticity of Taxable Income: Evidence and Implication, Journal of economics 84:1-29. Statman, M, 2010, What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions, Washington, DC: McGraw Hill. Tatge, M 2010, The New York Times Reader: Business & Economics, New York: CQ Press. Read More