Receiving Bonuses when Banks have been Bailed out Finance Essay

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As expected, the answer to this question cannot be framed in a simple Yes or No, because it is a complicated situation where the financial sector employees are gifted with huge bonuses to retain them and keep them motivated but it is highly debatable as to how feasible it is to continue doling out bonuses even when they are being bailed by the national governments during the recession. The Secretary of Financial Services UK, Lord Myners clearly indicated that there has been improper management of financial institutions during crisis which led to such widespread wreckage of financial system (Tanners, 2009). President Barack Obama called the bonus payments by the Wall Street firms as “reprehensible” while the US banks, financial firms and companies suffered from deep recession in US and other countries. He called it as the “height of irresponsibility”. A shocking example of related activity was the decision to purchase a corporate jet plane worth 50 million dollars by a big name Citigroup Inc. while it was being rescued with help from Troubled Assets Relief Program (TARP) in US. This shows that the financial firms kept on paying bonuses despite of being aware that they themselves were in deep trouble. White House Secretary went on to say that this sort of shocking acts by firms will destabilize the financial system instead of bringing it up from shocks (Goldman and Runningen, 2009). There has been huge uproar in the US and UK financial systems with banks paying out bonuses while the public is losing its money. A recent example of such unappreciated activity is the Royal Bank of Scotland, RBSs proposal to pay £1 billion worth bonuses after being able to prop up £20 billion worth of public money. It appears to be a clear flouting of regulations that seem to be put in effect by the governments. It seems to be almost ironic how the banks and financial executives kept paying themselves big packets of bonuses and when they ran into recession; they were completely unaware of how it all happened. But even more appalling is that the practice continues. No different is Lloyds’ Group which has been severed during recession; however that doesn’t repel it from planning to pay several hundred million pounds of bonuses to its top executives (Brady and Randall, 2009). Somewhere it appears that this is advertently a matter of personal benefits. I will present some examples of large scale of salaries and bonus payments to top executives of UK banks who have been questioned regarding the bonus fiasco. Some of them are: Sir Fred Goodwin (Executive chief) of Royal Bank of Scotland earned around £30 million over 9 years and has received a pension worth staggering £8.37 million. Lawrence Fish (Non-executive chairman) at the Royal Bank of Scotland received £6.6 million in salaries and £1 million in pension. Peter Cummings (Former head of Corporate Lending- Halifax Bank of Scotland (HBOS)) earned £2.6 million in 2007 including a bonus of £1.8 million. John Varley (Chief Executive of Barclays Inc.) earned £2.42 million in 2007 and a bonus of £1.425 million. Bob Diamond (Former Chief Executive of Barclays Capital Investment Bank) earned a total of £21.3 million in bonuses since 2005.

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Source: The Independent, UK

The obvious result of such high bonus payments is the increase in risk taking by firms. The more the risk the higher are the probabilities of supernormal profits which ultimately means more bonuses for bankers and financial executives. This was obvious in case of aggressive expansion policies of Barclays and RBS and aggressive lending policies of Northern Rock in UK. The motive naturally, was to enhance profitability but with a view to raise bonuses for top shots (Pettinger, 2009). Had the motives of banks been less personal and more economic, we probably wouldn’t witness a series of collapses, both of economies and faith of taxpayers. Such reckless behaviour of top officials from financial services sector has been widely reprimanded but they don’t seem to take a lesson from it and continue on their bonus payment spree. If we try to look closer and in more detail, we will find that bonus, indeed has been a major factor in crisis. However there is more than meets the eye. According to Wright (2010), though the people in financial services chose the sector because of the intellectual stimulation it provides, they ended up being trapped in the bonus bubble as it sure doesn’t hurt to earn more money after all. In the article “The inconvenient truth about bonuses” Wright explains how bonuses show little correlation with the levels of performance. The fundamental problem here is to decide how much bonus is acceptable and when does it become too high. His analysis reveals that the remuneration levels are too high relative to the earnings of shareholders. To show it through an example, investment bank Credit Suisse earned an aggregate return of merely 4.4% while it paid its staff more than 8 times the left over profits (Wright, 2010). We need to understand that bonuses are no more a means to motivate or a form of incentive for rewarding performance of employees, high bonuses have become an integral aspect of remuneration in the financial services sector and the practice must be controlled in order to facilitate the recovery processes and avoid another crisis in crisis. Are trade unions still relevant in the current organisational context? Identify the reasons for and against their continued existence, providing examples from personal experience and/or recent business events.

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