Bankers Bonuses a Force for Good or Evil - Essay Example

Bankers’ bonuses a force for good or Evil By Macro and Micro Economics of Table of Contents Introduction3 Background Information 3 Success or Failure of the Policies 8 Conclusion 8 References 10 Introduction In the UK, there is a culture of Banks offering the bankers a salary of over one million pounds. Numerous banks gives their employees a huge sum of money in form of bonuses in some cases, they go up to double their salary. This trend is encouraging for the bankers to always think about their work and how best they can improve the current state. Essentially, the good salary is an incentive for the employees to always give the best to their organizations, however on the other side; it is a curse to the public, government and global economy in numerous ways. This essay seeks to dissect the negative side or the disadvantages that will be caused by the stringent government and European Union policies on limiting the Banker’s bonus, which is regarded as a force for good for the bankers and a force for evil for the public and the overall economy. Background Information Essentially numerous reasons are attributed to the culture of the banks offering lucrative bonuses to the bankers. Some of these include the motivation to work so hard in a bid to create more wealth hence more profits. This brings the aspect of profits depends on the individuals employees of a certain bank. This dependency on the operations and talents of various individuals is immensely attributed to the volatile nature of the banking industry in terms of profit generation. The banking industry has developed over time and it is at a point where profits can be generated by well organized and selected factors of production (SMITHERS, 2013). On a similar front, the losses can be made through uncontrolled payments such as the bonuses to the bankers. This is most risky aspect in this discussion since it has been attributed to the 2008 crisis where lucrative banks plunged into economic turmoil which ended them to closure. In addition, most banks extend the bonuses to the bankers, since the banks enjoy unwavering spot for bonuses because, when times are good and the overall nations’ economy is growing, the banks reap well in terms of profits and hence no doubt that, they will enjoy such pilferages. On a similar note, the banks find it hard not to give its employees the bonuses since they are metaphorically surrounded by bonuses since their stock is money. They use it to trade even in the stock exchange. This goes without a say that, the banks have the ability to extend large sums of money to the employees as bonuses because the money is available. However the question arises whether the government policy through the Bank of England on capping of the bonus and crawling them to 10 years will be the best approach to solve the problem and also cushion on the future impending financial crises that face banks to an extent to being redeemed to functionality by the taxpayers’ money (ADMATI & HELLWIG, 2013). In addition, is the European Union’s pending policy on capping the bonuses a solution to this trend? Will these policies assure the public economy? Will they serve the intended purposes? These questions brings us to the effect of stringent polices on the banking industry and the overall economy of a nation. The policies will also be attributed to the political scenario in the UK. Operation of the policies The UK government’s directive though the Bank of England to capping the bonuses by requiring the bankers to give back the bonuses up to seven years after the year of awarding. This policy is called the seven-year bonus claw back on errant bankers. This policy requires the bankers awarded the bonuses to repay even if there are instances of the share awards being cashed and spent. This is not a good scenario to a banker and the banks in London. It is not good news at all. It may appear a relive to the public and the government, but the communication is that, there is cost of jobs and automatic approach to pay the top and lucrative employees differently (SMITHERS, 2013). This poses a question whether the bonus cap will help in cutting the benefits the bankers receive. It is realizable that most banks will not want their lucrative employees to leave the organizations hence they will endeavor in increasing the base pay. This brings us to the point of evaluating the essence of the policies. Will they meet the intended objective? These polices makes the banking sector to become more political in terms of decision making. This is attributed to the fact that majority of the employees might not need the bonuses any more after the full implementation of the Bank of England policy of seven year claw back since it is a risky venture for those who may undertake the bonuses. It is easy to lose the money due to the three additional years of which the money could be clawed back, considering the loosely circumstances created. This leaves the employees in a series of either lobbying for increase of their base salaries or threatening to leave the organizations for other better jobs elsewhere. This will leave the banks with one option, the option of increasing the employees’ base pay to keep them (SMITHERS, 2013). If the Bank of England policy will create political temperatures in the banking industry which will eventually result to the instability of the sector, then London may not remain the center for international financial investments. Employees will opt to move to places such as Singapore where the bankers are well paid. After the 2008 financial crisis which left majority of the banks on their knees, the policies appear as ways of trying to avoid the same scenario. The authorities are working so hard to solve the problem of excessive risk-taking and rule-breaking. However, these challenges can be tackled through different approaches which do not affect the banking industry. The policy appears as an imprudent way of micromanaging private corporations instead of devising appropriate ways of identifying the wrong doers and prosecuting them (ROSENBERG, 2010). It is much easier to punish, fine and jail the criminals who are in to manipulate the economy through their positions in the various banks instead of creating continuous, complex and legal claw backs which are immensely attributed to various unforeseen drawbacks to the overall economy. London might face serious political wars amongst the leading political partiers if they find that, they are working towards policies’ whose visibility is unpredictable since the banks might decide to hide critical information such as the aspects attributed to the rise or decrease of interests rates of certain stocks (GEITHNER, 2014). When this information is hidden because of the stringent policies created by the government, it might be war between the balance of the business milieu and the political platform of the nations with the two sectors wanting to attain their interests. In the case of the politicians like the Labor party would want to entice the public with reforms aimed at improving the economy, however the intention is to gain political mileage with reforms which will kill the banking industry. For instance, the Labor party proposed that the Banker’s bonuses to be clawed for ten years instead of present seven years for cases of misconduct. This is an impractical reform and it is aimed at gaining the public mileage and not improving the overall economy of the UK. On the other hand, the business stakeholders will always seek redress on the effects of the policies on the overall economy. When we talk of the bankers leaving jobs in London and seeking lucrative positions elsewhere, the economy is on the downward trend and this will see London slip from the global competitive edge. This case scenario indicates the opposing forces between the political class and the business community (CHARTERS, 2012). However, it should be realizable that, the competing forces might not be similar to those of the market. The market forces define the overall economy of the nation. This implies that, the effects of the policies in the banking sector will be evident in the market since the banking trends forms a considerable section of the market forces. This brings us to the general knowledge that the best way to deal with the whole banking industry is through the reinjection of real capitalism into finance instead of the regulations which is rigid hence a hindrance to economic growth and a fertile ground for political woes. The other feeling that is created by both the Bank of England and the European Union policies is the infringement of the internal compensation rights of private corporations. The banks feel interfered with by these policies which require them to adhere to certain limitations when remunerating their employees. This scenario is not a good indication of the 21st century characterized by modernization and apt decision making. The banks feel that the government agencies should find ways of capturing the rogue banks officials and prosecute them. The policies represent a larger scheme of thwarting the banks director’s ambitions of revolutionizing the banking sector to higher levels that reflect modern competition (CHARTERS, 2009). On the other hand, the recent European Union policy on the limiting the bonuses to twice the base pay is a rejoinder to the moral hazard world governments has created in the banking sector. The treatments of big banks as too special or big to fail the governments have optimized the risky behavior. This has bred a very bad tendency of which the bankers do not take an opportunity to gorge on the risk since they are aware that in the vent of financial turmoil the taxpayers will step in (ADMATI & HELLWIG, 2013). Perhaps the convenient way of ensuring that the bankers do not allow risky games occur at the expense of the national economies is to allow them reap gains from their operations and the also pay for their mistakes. This implies that the banks should be left alone to offer the bank bonuses since it is a joint sweat of the employees; hence it should be distributed between the directors and the shareholders. Success or Failure of the Policies From the manner in which the bankers received the news of these policies they were not happy since it curtailed their freedom of enjoying befits attributed to their hard work, talent and experience. These policies have sharpened the banks to scrap the bonuses and invent ways of appreciating their hard work and talented employees. Ways such as increasing the base pay and adding talent payments on their salaries have enabled the bank to retain their employees. This is called as a “campaign of organized disobedience” which may take some time before it is known since it is an internal issue (ACEMOGLU & ROBINSON, 2012).The other aspect which is attributed to the ultimate failure of these policies is the feeling by the bankers that, their internal or private operations on remunerations has been interfered with by the government and this will see them improvise ways to hide from the policies. This will render them ineffective and only used as political tools by parties such as opposition Labor party of the UK. On the other hand, the policies may succeed due to the support from the European Union, which is closely monitoring the activities of the banks and fining them instantly in the vent they violet the regulation such as intentional hiking of the interests rates. Conclusion The bankers’ bonuses a force for good or Evil statement can be supported on various platforms, however, it is evident from this discussion that capping bonuses through policies such as the Bank of England and the European Union is not a good is not the appropriate measures of controlling the banks from offering bonuses to their employees. The fact that the bonuses have been attributed to the bank’s financial crises such as the 2008 global crisis; different approaches should be implemented to ensure that the whole banking sector is not affected. For instance, without the bank bonuses, the talented and experienced bankers will opt to move out of London to other places such as New York and Singapore where bankers are paid lucratively. This will imply that London will slowly slip from the international competitive edge and cease being a centre for financial investment in the European Union market. References ACEMOGLU, D., & ROBINSON, J. A. (2012). Why nations fail: the origins of power, prosperity, and poverty. London, Profile Books. ADMATI, A. R., & HELLWIG, M. F. (2013). The bankers new clothes: whats wrong with banking and what to do about it. Princeton, Princeton University Press. CHARTERS, D. (2009). At bonus time, no one can hear you scream. London, Elliott & Thompson. CHARTERS, D. (2012). Trust me, Im a banker: a novel. New York, Thomas Dunne Books. GEITHNER, T. F. (2014). Stress test. ROSENBERG, J. M. (2010). The concise encyclopedia of the great recession, 2007-2010. Lanham [Md.], Scarecrow Press. http://public.eblib.com/choice/publicfullrecord.aspx?p=662244. SMITHERS, A. (2013). The road to recovery: How and why economic policy must change. Chichester, John Wiley & Sons Ltd. Read More