NSFM opinion: What makes bankers happy?

Penny Shepherd writes: Since the financial crisis, there has been public outrage at financial services pay levels, and at “banker’s bonuses” in particular. However, most of the resulting debate has remained stuck inside the dubious paradigm that pay is the most effective way to motivate performance. This results in a potentially fatal assumption that if we can align payment with the right targets and probably also restrict the absolute amount then all will be well.

The elephant in the room is that it has long been recognized that pay may not be best tool to motivate great performance. Academics identified many years ago that pay is a “hygiene factor” not a motivator, i.e. people can be dissatisfied or demotivated by the level of pay they receive but it is other factors like achievement and recognition that motivate them. Research now suggests that financial targets may be counter-productive for work requiring creativity or judgement although this remains contested . And the use of high pay as a motivator in financial services may cause harm across the economy, and over the long-term.

Within financial services, pay is clearly about more than what cash can buy. In particular, given that financial returns are the industry’s measure of success, it isn’t surprising that high remuneration is the preferred way to signal high status.

Loss aversion theories highlight that it is harder to rein back excessive pay levels than to avoid them in the first place so, as the old joke says, ideally we wouldn’t be starting from here.

Nevertheless, the genuine and sustained public anger does creates a particular opportunity to shift to non-financial motivators and so create happier bankers, greater social acceptability and potentially also financial services that are better for clients, society and the environment.

We already see a new generation of pioneer bankers stepping outside traditional roles to tackle today’s sustainability challenges so there is clearly appetite for change, but there remains a lack of mainstream recognition that new priorities demand new incentives too.

There is a range of research to draw on in designing tomorrow’s rewards. Dan Pink’s widely publicized book “Drive” claims that autonomy, mastery and purpose are central; while, in “Predictably Irrational”, Dan Ariely suggests that social norms are more effective motivators than market norms. Academic Joel Podolny offers a sociological theory of market competition based on the dynamics around status.

Let’s use these and other insights to encourage great non-cash incentives in financial services and the wider corporate sector and shift the debate from today’s obsessive focus on the use of pay.

Penny Shepherd is Chief Executive of the UK Sustainable Investment and Finance association (UKSIF).

This article is part of our NSFM opinion series, in which participants propose specific steps towards real and sustainable market reform. Contributors write in a personal capacity. NSFM participants are invited to contribute to the series. Please contact Ebba Schmidt or Frank Jan de Graaf for further information.