The integrity of the pratice of paying bonuses has taken a hammering recently with the revelations that the bonus schemes in place at many financial institutions may have played a significant part in creating the credit crunch and the resulting crisis in the world economy. It’s giving incentives a bad name.
Mervyn King, Governor of the Bank of England, weighed in with:
“Banks have come to realise in the recent crisis that they are paying the price for having designed compensation packages which provide incentives that are not, in the long run, in the interests of the banks themselves, and I would like to think that would change,” he told lawmakers.”
The BBC’s Robert Peston, harbinger of doom to the UK banking industry, believes that banks should also introduce the malus, a kind of collective responsibility for losses.
It’s an idea that some banks, such as UBS, are already looking at:
“Swiss bank UBS adopted a similar system in November last year. Some banks are looking at what’s being called bonus banking, where parts of executives’ annual bonuses are withheld over three years, and adjusted based on long-term results, to discourage them from ramping up their bonuses by taking short-term risks. Swiss bank UBS, which adopted such a system in November, calls it a bonus-malus system,”
We have spoken before about whether users can ‘game’ the incentive solutions you are implementing.
But in designing the mechanics of any incentive solution, one must also take care that recipients aren’t able to accumulate rewards through unsustainable practices, ones that are not in the long-term interests of the company.
Are the behaviours you are rewarding sustainable?