Bankers' Bonuses 'Were Not To Blame' For Global Financial Crisis

Bankers' Bonuses Were Not To Blame For Global Financial Crisis

Bankers' bonuses were not to blame for the global financial crisis, a university study has claimed.

The research counters the claim that large bonuses in the banking industry were at the root of the world economic meltdown.

A study of executive pay found that although pay in the financial services sector was high - compared to other industries - there was no evidence to support the argument that inappropriate incentive structures led banking executives to take excessive risks for short-term profits.

Academics at the University of Bath undertook research to see whether bankers were over-incentivised by the promise of large bonuses to take excessive risks in return for short-term corporate performance.

They correlated directors' pay in any year with the share price performance of the company in the same year to see what the relationship was between pay and performance. They concluded that it was weak.

Professor Ian Tonks, from the university's school of management, said: "Following the crisis, a number of official reports have placed a lot of emphasis on curbing incentives, but in fact there is no evidence that incentive structures in banking were out of step with other sectors.

"Although pay in the financial services sector is high, the relationship between pay and performance in the run-up to the financial crisis of 2007/08 was not significantly higher than in other sectors, and was generally quite low."

The research showed a stronger link between executive pay and firm size, implying that executives may be incentivised to "grow" their company, either by internal organic growth or acquisitions.

Prof Tonks said: "Of course, it could be argued that the experience of the financial crisis has shown that banks are so important to the functioning of the global economy, that compensation packages should be less sensitive to performance than for non-financial firms. I should emphasise that we are not trying to defend bankers' pay. Our argument is simply that any poor decisions made by bankers that led to the financial crisis were not made because of their incentive payment structures."

The Treasury has recently launched a consultation with the aim of improving transparency at around 15 banks.

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