Will bonus caps improve banking industry?

Deutsche Welle, 3 March 2013

On Sunday (03.03.2013), the majority of Swiss voted to cap bonuses paid to bankers in a national referendum - two days after the EU chose to limit bonuses paid to bankers from 2014. But will that help?

Greedy, selfish bankers - that's the image that has been engrained in the minds of many since the beginning of the financial crisis. One of the responses from students at Harvard Business School was to create the MBA Oath, which allows students and graduates to pledge to "create value responsibly and ethically." But this is probably easier said than done.

In fact, it's not only society that a banker has to serve, said Würzburg-based economist Ekkehard Wenger. Bankers are not only focused on ensuring their livelihoods,they also have to make sure that the customer isn't cheated and that the bank makes profits, he added. The banker has to please many parties.

Bankers as allrounders

 "One banker can't change the
 system," says Lütge, a business
ethicist

So what is a "good" banker? One who is honest, adheres to the law and loyal to his business is a good banker, according to business ethicist Christoph Lütge. A "good" banker would not only work speedily on behalf of the customer, he would also keep an eye on sustainability - and he is supposed to do all of that as transparently as possible. Large bonuses are justified "if one gives the right incentives and says, 'yes, give out high bonuses, but only when you do your business sustainably,'" Lütge said.

But sustainability, in particular, was not rewarded for a long time, according to economist Wenger. "People were paid for things that briefly appeared successful but turned out to be a nonstarters in the end," he said.

Lured by the model

By the 1980s, at the latest, bankers relied more on machines, according to business historian Werner Abelshauer.

"Scientists had developed models that could supposedly eliminate risks to a large extent. It's no longer the banker who creates trust, it's the algorithm, the technology," he said, while adding that at that point certain tendencies for criminal activities entered the banking world.

Morals and money - how can they go together?

The algorithms that appeared infallible to many bankers were simply too tempting. "The system bears the risk for the human side of this business to disappear," business ethicist Lütge warns. Every human being needs a clear set of rules, otherwise he would be quickly overwhelmed, he adds. As a result, Lütge doubts the merits of Harvard Business School's ethics oath. After all, one person alone can't change the banking system.

Coming up with new rules

Abelshauser: "People didn't trust
the banker, but the algorithm."

However, many banks have come to realise that a system of short-term bonuses doesn't help during the course of the current economic crisis. So they have switched to bonuses based on medium or long-term achievements.

Putting maximum caps on bonuses, valid across the EU is yet another step. From 2014, extra payments will not be able to exceed fixed annual salaries - only in exceptional cases will it be possible to double the amount. This is intended to make banks and the whole industry less prone to risks.

The effects of the EU's restrictions on banking bonuses remain to be seen - only time will tell whether bankers will be driven more by morals than the quest for profits. As an ethicist, Lütge advises young bankers to take on a broader perspective and to possibly look into philosophy or other social sciences.

But economist Wenger is more pragmatic. "There is no point asking from a banker to be a better man than, say, politician who takes his voters for fools. After all, we don't have such high expectations from that [a politician] either," he said.

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