The Fourteenth Banker Blog

April 7, 2010

Questions for Readers

Filed under: Running Commentary — thefourteenthbanker @ 12:52 PM

So here are questions I would love to see comments on.

In companies that offer high incentive rewards, do the rewards become a addictive and does it result in ethical deterioration among the participating employees? How do you see that manifest itself?

And, if you care to elaborate, do you see negative long term effects on employee well being, an increase in self destructive behavior, or acting in an anti-social fashion including no longer putting the customer’s best interest before the employee’s selfish interest? If so, who would you ascribe responsibility for that state of affairs?



  1. I think many people become addicted to the cash (I’m pretty sure that is deliberate) often heard people comment on how they couldn’t possibly survive on a sum that to the man in the street would be a king’s ransom. What comes next is usually a sense of entitlement leading to anti-social behaviour both inside and outside the work environment. Not sure that you can ascribe blame to the individuals or even the companies concerned, they are often victims themselves (how many happy junkies do you know) so much as blame it on the system. That doesn’t mean we shouldn’t do something, after all we sanction the criminally insane, but that we need to address the root of this behaviour. Finance needs to be stigmatized as a slightly grubby socially marginal (if necessary) enterprise, maybe akin to the porn industry, which would hopefully halt the self-destructive arrogance and the drain of talent away from more productive activities which is perhaps the biggest social cost of all.

    Comment by Tim — April 7, 2010 @ 2:18 PM | Reply

  2. I think it’s more like a slope–the money affects thinking, even when we don’t think it does, the way a slope affects walking. The problem isn’t so much outright corruption, though that is sometimes present, as a kind of “tilt” in thinking–the sort of thing we are seeing from the financial industries, where people’s thinking has gone awry, without them even quite realizing how off-kilter they are.

    I think this also affects academic economics, where money seems to have persuaded a substantial number of academics to abandon the basic scientific ethic of the primacy of experimental data over theory.

    Comment by The Raven — April 7, 2010 @ 2:41 PM | Reply

  3. The two previous comments are spot on, but I would add that when it seems this is “normal” – when “everybody does it”, it skews perception, too. And when everyone is in the same social circles – same prep schools for the kids, same Ivy League colleges, same vacation home locations, etc., one does lose a sense that this isn’t normal – this is privileged, even extravagant. If you never rub elbows with the the kid in the mail room, let alon
    And speaking of the kid in the mail room, I wonder how many of the wonder boys (and they’re mostly men), who rake in the huge sums, started in entry-level jobs?

    Comment by Sandi — April 7, 2010 @ 5:55 PM | Reply

  4. These are silly questions. Of course the answer is a resounding ‘YES’ to all the above.

    I don’t think high incentive comp. is necessarily ‘addictive’ – ‘high’ incentive comp. in our world equates to $millions/year – in which case it’s hard to find yourself in debt unless your wife is Emelda Marcos.

    What it becomes is a litmus test for how good you are. Bonuses are compared and competed over like League Tables. I don’t think ethics enters into the equation at all in employees’ minds. If you’re incentivized to do it – it’s right. If you’re the richest guy at the table, you’re the best. That’s the ‘ethic’.

    Negative long term effects?: an insular, competitive, dog-eat-dog mentality; a slavish self-interestedness focused almost exclusively on ‘winning’; an eagerness to establish a zero-sum game between you and your ‘Clients’; a belief that politics always trumps performance; a moral relativism focused on self-promotion; a tendency to equate ‘finding solutions’ with laying blame; a feigning ignorance of realities that conflict with your own personal advancement; fundamental belief that traditional ‘ethics’ are for suckers; a mercenary desire to take the easy road (ascribe it all to your zeal to drive ‘shareholder value’, even when your stock’s in the crapper); … I could go on, but I suspect you get the drift, and have experienced it all first-hand as well.

    Comment by Lucy Honeychurch — April 7, 2010 @ 6:10 PM | Reply

  5. There is NO other industry that rewards people for taking risks without consequence than being at an investment bank, and the best part is that the money your are gambling with are honest deposits that isn’t yours! An amazing amount of people in banking lose hundreds of millions of dollars only to resurface at a different firm with a guaranteed basket of money 3 months later after playing golf for the summer only to gamble another couple hundred millions dollars of depositor money away. It’s a disgusting process that needs to end, separate the risk from the deposits make banks utilities and let investment banks like GS and MS fail when they make horrible errors in judgement. Banking is a tax that needs to be reduced, any banking profits are always a tax on the general public BY DEFINITION.

    Comment by cidiel — April 7, 2010 @ 6:25 PM | Reply

  6. More money is made if people are suckers, so simple price histories (real!) are kept little-apparent, and of course DON’T SAY SO.
    For example:
    (1) one-time-only WSJ 3/30/1999 chart of the Real Dow:
    (2) one-time-only NYT 8/26/06 chart of Real Homes:
    (3) the real histories of Prof. Robert Shiller
    (4) my “Real Homes” at

    (5) my “Real Dow” at

    Comment by Ed — April 7, 2010 @ 7:29 PM | Reply

  7. I think it’s useful to see the big bonus as part of a firm’s star culture – there are winners, who get the big bucks but also a range of less easily quantifiable perks in the firm, and there are losers who will eventually get the message and leave for a less prestigious firm having been trained by the “best” (or so the ideology runs). Once you’re identified w/in the firm as a “star” you have to screw-up big time because the firm as already invested so much in you that the top floor is reluctant to admit you’re a dud and they’ve wasted the dough. It becomes a self-reinforcing loop. So, having been told your da bomb and having had that verdict confirmed with tons of the green stuff plus constant princely treatment, why wouldn’t your ethical sensibilities turn to mush?

    Comment by Pudentilla — April 8, 2010 @ 3:38 AM | Reply

  8. Agree with the silly question & resounding yes comment.

    Employees start behaving in ways that are not responsible to the investment, investors, or even the stated purpose of the company. It is totally fine to complain bitterly about being underpaid when you are still making more than even highly paid people for the…frankly the same amount of work with less benefit to society.

    Most people are not immune to this. Money is seductive and will become its own justification even if it was not to begin with. Most people start to take it for granted almost immediately. I found the pay scales and sense of entitlement to be completely shocking at first, then start to feel it was simply the way of the world… Though it never seemed justified or ‘earned’, so much as simply taken off the table though opportunity that was afforded on account of the proximity to large sums of money, relative opacity of the transactions, and respect and sense of awe accorded to the profession by outsiders.

    Comment by GM — April 8, 2010 @ 9:51 PM | Reply

  9. The wider the income gap becomes from average citizen to the investment banker will only make matters worse. Obviously, conflict is human nature but as that gap grows our conflicts will only get worse. In nature, this is how speciation takes place. As long as we consider all humans equal we have to be mindful that the lead dog is only as strong as its pack so to speak.

    I personally have no problem paying someone alot of money for excellent performance but it does make me uneasy when they have no ownership stake in the work that they do. There have been many recommendations on pay including clawbacks, paying over longer periods of time, etc which all seem to be a step in the right direction. I kind of wonder if the basic corporate structure is to blame. Would a company in the S & P 500 who has to constantly answer to Wall Street quarterly performance standards make a similar decision as a smaller company who may make not make the most immediately gratifying decision but a better decision in the long run? A lot of blame can be placed with the incestous relationships of these corporations boards and management.

    Comment by J. Blackwell — April 9, 2010 @ 1:51 AM | Reply

    • There are a couple issues here. The amount of money paid should be generous when the value creation is substantial. The estimation of value creation is what is problematic. It inevitably gets down to data the temptation to game the data is pretty great. When you create a system that is about incentives, you set up a risk reward situation. If the reward is great and the risk is small, or “worth it”, the decision to take the risk can be seen as perfectly rational. That assumes that these ground rules. Not everyone will cheat though, because for many there are other values and risks at stake. What would my spouse say? What about my reputation if I get fired? Will I go to hell? Etc.

      The next problem is whether the value creation is just for the cost center, the whole corporation, or all the stakeholders including the customer.

      The third problem is that when money is directly tied to transactions, it gets into the mind of the banker and the way they behave in relation to that transaction can’t be made absent the consideration of money in at least the back of the mind. It can easily kindle a regret for doing the right thing, but not getting the money. Or it can kindle pleasure for doing the wrong thing and getting paid. Suppress the negative emotion and you are ahead. Perfectly rational. I could go on at length about this.

      Comment by thefourteenthbanker — April 9, 2010 @ 9:47 AM | Reply

      • I will add a fourth to your three points: namely that, as our biggest banks proliferated by acquiring others, very little time was spent actually integrating systems.

        Why should such a mundane thing matter, you ask? You’ve acquired a smart, small bank, effectively elminiated a potential competitor, and certainly reduced the competitive landscape – so just get on with it!

        Also, why bother with boring consumer/commercial metrics when it’s the ‘sexy’ IB-based products (like derivatives) that got us in trouble? The answer is (a surprise to some) the consumer/commercial banks contain the VAST PREPONDERANCE of assets in any of these banks – not the IBs. You could not engage in the risks that are common at the IBs – without the assets of the consumer/commercial banks to prop-up your balance sheets at the top end. There would be relatively few big ‘institutional’ investors without consumers’ and small business’ savings, retirement funds, etc… to manage. The consumer/commercial banks are the foundations that make our modern IBs possible.

        Getting back to the point, and I’ll try not to get too technical here but, every bank has it’s own calculations for such fundamental metrics as: a customer, attrition, average daily balance, etc… These calculations are the bedrock – the foundation – of performance management at all levels. Lack of post-acqusition technical integration has caused these definitions to proliferate.

        At an average American global bank (combined consumer/commercial/IB), they cannot definitively tell you how many customers they have (!), there are over a dozen calculations for attrition, ADB, etc… Surprisingly (or not) none of the calculations for these metrics are clearly defined at the regulatory level. The calculations that ARE defined by regulators (like VaR and capital requirements) contain component parts that are derivative of these most basic calculations/metrics. As a result ‘performance’ overall and at all levels (corporate, Client, Customer, Product, Segment, geography, employee, division, and all the rollups derivative thereof …) is an extremely fungible and flexible concept.

        There are many reasons for this: 1) managers like it that way because they’re paid to ‘always deliver good news’, 2) technical projects are kept to a minimum as a cost savings measure, 3) incompetence, 4) to enable quick passage of internal/external/regulatory audits by using the metrics that tell the happiest picture… the reasons are manifest.

        Prior to this financial debacle, we all discussed and debated the ‘Too Big to Manage’ concept. I would argue that, from my experience, these large firms are not TBTM, but that the managers themselves are too well insulated by the realities of their mismanaged infrastructures, for ANYONE outside (and many inside) to accurately assess what’s going on with the business.

        As a result, most of our banks are grand castles built on sand.

        When you cannot assess ‘performance’, good politicking becomes the primary determinant of good performance. Our banks have extrapolated this now-engrained principle to extremes. Like Rubin getting a guaranteed $15MM with no business management responsibilities attached, except to use his political influence to repeal Glass Steagall, and otherwise pave a smooth path for the firm at the legistlative level.

        After all, you can’t effect massive transfers of wealth from the bottom to the top of society without the pols on your side.

        So, for all those who advocate stridently for a ‘Pay for Performance’ ethic – I would ask you to dig a little deeper into how ‘performance’ is defined.

        Comment by Lucy Honeychurch — April 10, 2010 @ 12:12 AM

      • Here’s another good article about the difficulties of legistlating bank performance measurements from the Real-World Economics Review.

        I can attest to this difficulty and to the shenanigans that go on internally around metrics. The effort to create roll-up metrics (both internal performance management and externally reported capital, etc…) for my TBTF always felt like cleaning-up my bedroom by shoving everything visible underneath the bed.

        On the issue of capital requirements/leverage ratios addressed in the article you can add the absolute fiction of mark-to-model GAAP accounting to the described difficulties in legistlating metrics. The problem is that the legistlation and/or regulatory standards need to be defined at a much more granular level. To effectively implement a Basel III we, literally, will need to create standard definitions of the most basic elements at the granular level that roll-up to create metrics like leverage ratios and capital requirements to ensure the reported performance metrics match the intent of the rules/regs.

        Yet another compelling reason why TBTF banks should be broken-up, and their business models simplified.

        Comment by Lucy Honeychurch — May 25, 2010 @ 10:58 AM

  10. The assumption being that there is no consequence for ‘ethical deterioration’?

    Comment by Gayla — April 9, 2010 @ 3:06 AM | Reply

  11. It all depends on what the incentive awards are rewarding. “Good work” is many dimensional: how well it serves its customers, how efficient it is, what it brings in financially (both for long and short term) for both the shareholders and the workers of the company (which include CEOs–they are not separate), how it promotes the health of the community around it (which is the future of the corp, after all), etc. If work is measured by broad standards, extra-ordinary work can be awarded. Conversely, if these things are not being well served, decentive consequences, in a steep curve towards firing, might also be applied.

    Comment by Patricia — April 13, 2010 @ 11:30 PM | Reply

  12. Mozart bequeathed to mankind some of the greatest treasures ever created and received nothing. Bankers have ruined the world and received bazillions.

    Comment by Lud — April 14, 2010 @ 12:24 AM | Reply

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