I don't care what their contract says, bonuses are bad for business

I’ve never received a bonus payment from my employer, unless you count the gift vouchers that were handed out periodically at the law firm where I used to work. I have always accepted jobs on the basis that I get paid exactly what it says in my contract and no more, no less. Naturally, ever year I prayed for at least a 10 per cent pay increase and usually received about 3 per cent, although my last pay increase as an employee was a big fat 0 per cent, along with most of the rest of the working population.

Ok, so most of my employment has been in the public and not-for-profit sectors, where, of course, everyone works for the sheer love of it.  Nonetheless, I find it rather hard to feel any sympathy at all for Stephen Hester, the man charged with turning around the basket case bank RBS, who has had to hand back his 2011 bonus of ‘just’ £1m.  Particularly since it took the threat of a Commons vote on the award from the 82-per-cent-state owned bank to persuade him to give it up.

All the same, I can imagine he might feel a bit hard done by when he is having to clear  up the almighty mess left by Mr Fred Goodwin, who may have lost his knighthood but still enjoys an effectively taxpayer-funded pension of £342,500 a year from the very bank he drove to the brink of oblivion.  Oh and don’t forget the £2.8m lump sum he took when he left and £2.6m bonus he received in his last year.  Poor Stephen Hester, he must think someone has it in for him.

Hester’s bonus will be part of his contract, as were Goodwin’s pension’s arrangements.  It would have been quite difficult under the law to prize these entitlements away from them without any evidence of wrongdoing.  Which is why it’s probably time to do something about the law that allows such absurd payments to be made on the basis of not very much at all.

There are, in fact, two types of bonus payment: guaranteed, which is usually paid across the board to the whole company; and discretionary, allegedly based on an individual’s performance.  Except that they are not really discretionary and seldom seem to be based on performance (enter the bankers).  The implied term of any bonus scheme is you’re entitled to expect your employer’s discretion to be neither irrational nor perverse.

Heaven only knows what that means, but in practice it means most bonuses do get paid.  Those that don’t can be open to challenges on the grounds of discrimination, particularly in the City where employers often have no written records for awarding bonuses, making it very difficult for them to explain why, for example, female employees have been awarded less than their male counterparts.

And let’s be clear about this, it IS normally women who get lower bonus payments.  An astonishing study of senior executive pay by a team from Exeter University and Tilburg in the Netherlands between 1998 and 2004 found that while women’s bonuses change very little however well or badly the company does (only about 4 per cent), men are punished much more for poor performance but hugely more rewarded for good, a whopping 263 per cent more.

I could trot out a whole host of reasons as to why I think this happens, none of them good.  But I want to stick to the bonus culture and why it’s so bad for business.  The prime minister mocked Labour leader Ed Miliband in the Commons today for suggesting in a speech that performance-related-pay should be banned.  As well as being impractical, Cameron suggested such arrangements were ‘pro-aspiration’ and important for people working in offices and factories around the country who ‘need financial incentives too’.  Well I’m with Tony Shearer, the boss of Abbey Protection, who said on BBC’s Newsnight on Monday that a normal person should regard being offered ‘an incentive bonus’ as an insult.

It also flies in the face of the science.  It may surprise you to know that people are not, in fact, motivated by money.  Or maybe not, since a good portion of us strive to do well in jobs without bonuses and with crap pay.  But research bears this out.  Although monetary rewards can incentivise people doing tasks involving only mechanical skill, as soon as tasks require even rudimentary cognitive skills (ie you have to use your brain) a larger reward led to a poorer performance.

Yes, you read it right:  a larger reward led to a poorer performance (enter the bankers again).  What the research seems to show, and what you can actually see time and time again in any manner of situations, is that money is a motivator, but only to the extent that people don’t have to worry about it.  You just have to pay people enough so they aren’t thinking about money and they’re thinking about the work.  What really motivates people is not a £m bonus, but autonomy, mastery and purpose.

It’s not rocket science.  We want to do something interesting, we want to get better at it over time and we want to feel as if we’re making a contribution.  What we are seeing in the banking crisis is the complete antithesis of this.  We are seeing a profit motive completely divorced from any sort of purpose motive and totally out of control and that’s when bad things happen.  Sometimes very bad things.

Employment lawyers have been warning that British banks will be hit by legal claims in 2012 from bankers who have been denied bonuses.  Paul Quain, a partner from GQ Employment Law summed it up thus:  ‘There is a huge disconnect between bankers’ perception of their rights and the legal reality.  Bankers seem to have an expectation that they are entitled to a bonus under almost any circumstances’.

‘Entitled’ being the key word, which is odd given that the money they are laying claim to, in all probability, belongs to shareholders, customers or, in some cases, taxpayers.  It also goes to show the extent of the problem.  To be honest I don’t think warnings from the governor of the Bank of England or the deputy prime minister are going to stop them.  Only making it illegal is going to do that.  So go on prime minister.  I dare you.