Bankers’ bonuses did not cause crisis, claims Bath University study

There is no evidence to suggest that bonuses encouraged bankers to take excessive risks for short-term profit, according to a new academic study.

An analysis of executive pay carried out by researchers at the University of Bath argues against the notion that the banking industry’s use of bonuses made its executives more willing to undertake risky activities.

The study compared directors’ total pay with the share price performance of the company in the same year to determine the relationship between pay structures and corporate performance.

It concluded that any relationship between the two is weak.

Ian Tonks, a professor with the University of Bath’s School of Management, says: “In fact there is no evidence that incentive structures in banking were out of step with other sectors.

“Although pay in the financial services sector is high, the relationship between pay and performance in the run up to the financial crisis of 2007/08 was not significantly higher than in other sectors, and was generally quite low.”

Tonks concludes: “It’s difficult to see how incentive structures in banks could be blamed for the crisis since there is little hard evidence that executive compensation of bankers depended on short-term performance: they were paid high salaries irrespective of bank profits.”

In October, research by Nottingham University Business School also cast doubt on the perceived link between the financial sector’s bonus culture and increased risk-taking.

The study concluded that bonuses during the run-up to the 2007 financial crisis were principally driven by companies’ profitability and the number of targets on which payouts were based rather than the short-term performance of executives.

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