Posts Tagged ‘banking’

Rewarding strategies

Children have a natural talent of seeing the obvious differences between right and wrong. Killing is bad, caring is good. However, in real life it is often more difficult and that’s why already on an early age parents teach their children the more difficult right vs. wrong subtleties. Parents have a natural talent by themselves to use excellent rewarding and punishing systems.

The financial crisis that the world is suffering from at the moment causes new ways of looking at things. Monday the papers reported a new insight on the banking leadership intricacies, and especially the rewarding systems that intended to promote good above bad behavior. And how this system had obviously failed. According to the (Dutch) newspaper article, the bonus system for the banking management was based on growth and in a world market growing to it’s limits, this promoted taking excessive risks. In the end the risks were not containable and in a way the bonus system has contributed to the current crisis.

What is the problem with this bonus system? On it’s own it sounds quite good to promote growth. The issue is that this kind of goals (like growth, or profit, or margin) are very short term goals, focused on high visibility and immediate measurability. It’s very weird that the long term strategies taught to us by our parents, like “what goes around comes around”, are not considered by the financial top management of our world.

Unfortunately it is not just the top management that is measured by short term goals with no stimuli to consider long term consequences. The top management communicates the strategy (or rather short term policy) down to the lower management, which is confronted with one year goals, even if it would like to focus on the future of the company instead.

There is hope however. In a commercial world largely driven by shareholders, especially the shareholders will see that the short term results of a company are not relevant if the long term results are not satisfactory. They will reflect this to the higher management and put an end to short term rewarding systems. That’s why in some modern companies the yearly bonus systems are already being replaced by new systems that take long term strategies and visions into account. Financial institutions and other more traditional companies will shortly follow. Management, but also other employees for example will be given half year goals, two year goals and five year goals, which will secure rapid improvements combined with mid term strategies and long term vision. Companies that do not adjust, will just not make it.

Addition 23-11-2008:
Proffessor Piet Keizer from the Utrecht University suspects a strong correlation between the emerging financial crisis and the fact that the financial world is ruled by mostly men. “Men among each other often show macho behavior, top executives tend to narcissism; the bigger, the better.” [translated from Dutch]. Risky behavior is perceived to lead to prestige, especially in the United States, according to the proffessor who specializes in the relation between economics and social sciences. (Volkskrant, November 2008)