The self-created myth of the need for bonuses in the financial sector

New research suggests top executives think bonuses are more important to others than to themselves

February 2010. Financial bonuses are powerful and important incentives. New research by David De Cremer, Professor of Behavioural Business Ethics at Rotterdam School of Management, Erasmus University and Visiting Professor at London Business School, shows that top-level executives in the Dutch banking sector believe bonuses are important, but not for themselves, only for their colleagues.

According to the research, executives also believe it is only their colleagues who are spurred into better performance by bonuses, and not themselves. De Cremer said: “The findings of my research demonstrate that the need for giving bonuses within the banking world is a self-created myth.” Although top executives are influenced by bonuses and accept them as a means of attracting top-level talent, it has become clear that they prefer to do business with a different type of banker – preferably someone who puts the interests of the customer first.

De Cremer adds, “The outcome of my research makes it very clear that the whole notion that bonuses are very important, as promoted by the financial sector in the past decade, is at least in part a self-created myth – one that claims that the intrinsic motivation of many bankers may be undermined by the absence of bonuses.”

Excessive bonuses are the most frequently mentioned example of unbridled self-enrichment in the financial world, and their use has changed very little in the wake of the credit crunch. On the contrary, it is evident that a great many employees of investment banks are receiving huge pay packages, and it is argued that they are needed to bring in and retain financial top-level talent.

The fact that so many employees are receiving bonuses creates the impression that the term “top-level talent” is being used very loosely. Moreover, many Dutch people complain that employees primarily motivated by financial gains do not fit very well into their social market economy. So is the system of bonuses everything it is cracked up to be? This question formed the starting point for Professor De Cremer in examining the true value of bonuses as a performance-improving tool.

Rotterdam School of Management, Erasmus University, is a top-ranked international business school renowned for its ground-breaking research in sustainable business practice and for the development of leaders in global business. Offering an array of bachelor, master, doctoral, MBA and executive education programmes, RSM is consistently ranked amongst the top 10 business schools in Europe. www.rsm.nl