Capitalism & Morality
Is it necessary to present the reward system of the banks to change to make it morally acceptable?
Abstract
The past months had been the front pages of newspapers filled with news about the credit crisis. Al soon saw that the debt of the credit crisis lay with the bankers. Then came the towering bankers’ bonuses in the publicity. One finds that the current remuneration system on morale is acceptable. In my paper I will present the reward system of the banks under the microscope and then I will paint a clear picture on the question whether it is necessary to intervene in the current situation.
Capitalism & Morality
The balance between capitalism and morality
V
Today is the day the pay of the banks a much discussed topic in the media. In every article that we read about the current credit crisis, we see that a large part of the article is devoted to the current reward system of the banks. The professors in the economic-financial area it together agree that the biggest cause of the credit crisis lies with the banks.
In society, the emotions of the citizens on the bankers behavior set off. Thus they believe that the directors of large financial institutions usually ‘only’ from own interests. The bankers are in fact too much focused on the highest possible bonus. This resulted in risky transactions in the short term to maximize returns. All this has caused, that the financial system now is upside down.
As we have seen, the policy was closely involved in the credit crisis. There are many economic committees to investigate exactly where it all went wrong. In addition, numerous scientific studies carried out for an answer to the question of how the credit crisis has arisen and how now to proceed to a similar crisis in the future. Many parties argue that the current banking behavior is morally unacceptable and that politics should intervene quickly in the current reward system of the banks. The first thing one may ask is: Why is it morally unacceptable? By this question we come immediately to my research question: Is it necessary to present the reward system of the banks to change to make it morally acceptable?
In my paper I will formulate an adequate response. But before I give an answer to ga, I will first explain a few things. To begin, I will tell how the current debate surrounding the reward systems of the banks formed. I will also explain how the current reward systems of the banks look like. Finally, how the authorities responded to the current behavior concerning bankers’ remuneration and especially how they want to tackle.
The emergence of the contemporary debate surrounding the reward systems of the banks
I
n autumn 2007, we noted that it was not well with the housing market in the U.S.. A mortgage loan for buying a house was without any risk research provided. Many people in the U.S. got a mortgage that they themselves could not afford. The banks had lent too much money irresponsibly. When housing prices went down against the odds, while these people could not pay their loans, the lenders were in trouble. The banks had the houses as collateral, so in times when house prices rose, it posed no problem. Unfortunately, the mortgage that just kept rising while home prices fell more. This meant that the banks still saw their investments decline. The banks responded by these dubious loans into complex financial structures to pour and sell them to other investors. The beginning of the discussion concerning the bankers had started this behavior.[1]
During the year 2007, the impact becomes more visible. The bad behavior of the banks and the risks were not adequately assessed, were more and more publicity. The financial market this information to process, with the result that the share prices of major financial institutions plummeted. Many financial banks in the world ended in the red. Result, many banks were on the verge of bankruptcy. Confidence in the financial system was minimal.
During the year 2008, it was a fact that has become the international financial system had collapsed. Also in the Netherlands were the symptoms of the credit crisis (position Fortis Bank & ING) found. The government had to intervene to prevent bankruptcies, with consequences for the financial system in the Netherlands.
The government intervened in clear, was nationalized Fortis Bank and ING also received a capital injection of 10 billion.[2] This is all the confidence of the people in the financial system to recover. At this stage the credit crunch was limited to the financial sector. Despite all the good and necessary public policies to reduce damage as much as possible, the crisis hit in the second stage to the real atmosphere. This became a real economic crisis, and as promised, the deepest after the great depression of the 30s of the last century. The crisis is also called the great recession.[3]
Economists, government and society who analyzed the main culprit for the credit crisis. Over time, it became increasingly clear that the fault lay with the poor bankers behavior. Thus the banks irresponsible risks in the short term to maximize efficiency to achieve. The collapse of the housing market in the U.S., was the straw that broke the camel.
Many studies have taken place to determine the cause of the irresponsible behavior of bankers mapping. Research has shown that the reward has been a cause for the irresponsible behavior of the bankers. The society came to a consensus, the current reward system is morally unjust. But why was it unjust? And how does the current reward system of the banks look like?
The current reward system of the banks
H
et current reward system of the banks consists of several components of remuneration. This gives the board members of banks in addition to fixed remuneration also a variable. This compensation is variable depending on the results that are to be achieved. This kind of reward is also called a performance-related pay. Performance-related rewards come from the agency theory (Corporate Governance).
Agency theory & Performance-reward
The agency theory stems from the separation between the shareholders and directors. The shareholders give the power to lead, to the directors. There is a conflict (conflict) between the shareholders and board members. Efforts to increase shareholder value, while other directors may have interests, such as high yield potential individual gain. If the directors would receive only a fixed salary, they would not be sufficient incentive for “good” the interests of the shareholders’ interests. And therefore work alongside banks with variable pay to fixed rewards to prevent this phenomenon. Performance-reward makes sure that drivers are stimulated to do a good job.
Disadvantages of the current reward
Given the behavior of the bankers, we can say that performance-reward also has its negative side. The last time the bankers’ bonuses were often in the publicity. Many critics are agreed that the sky-high bonuses to ensure that the drivers will make abuse of performance-based rewards. The directors are then directed transactions take place, to the highest possible return. Usually, as we have already indicated, these were high-risk transactions. In the short term it was very attractive to such transactions to take place, but given the long term it was just very discouraged. We can conclude that directors ‘explicit’ aimed at short-term high results at such high bonus potential to win.[4]
Furthermore, the reward structure in the financial world asymmetric, profits are rewarded with large bonuses, but losses are not penalized. This can be seen as an error in the reward.[5] In addition, the directors of the banks made ??abuse of their position, as they usually acted out unwanted greed. Unwanted greed can be seen as greed that entails damage to others.
A clear example is the most prestigious (for the credit crunch) Investment Bank of the United States, called Goldman Sachs. In the year 2007, they have a record amount of $ 20 billion paid out in bonuses. A few months later, however, the bank was on the verge of bankruptcy.[6] This gives a clear signal. We can conclude that there is indeed something wrong with the current remuneration system.
In short, we can say that performance-reward stimulates the bankers to increase their productivity with the aim of achieving the highest possible performance. The problem lies mainly in the measurement of such an accomplishment. We have also seen that the abuse of bankers here have made. This we may describe as unjust act.
Reaction of the government & Where to go
“U.S. President Barack Obama wants the freedom of the big banks in his country firmly constrained. American newspapers reported that the Washington Post, the Financial Times and the Wall Street Journal. Obama will come later today with proposals for the size and trading activities of financial institutions to limit ‘ .[7]
D
main World President, Barack Obama, spoke with sharp words towards the members of the U.S. banks. He indicated, as we read above, that the trading activities of financial institutions should be limited. In addition, he indicated that the bonuses to be curbed. The statements of Barack Obama, may be seen as a general view of the governments in the world.
How to proceed?
To begin, a reward is not possible without bonuses in banking. The current understanding of the bonuses should get a different positioning in banking. One should not as a performance incentive bonus, but as a proof of value delivered. Added value should be seen as a desired outcome that is delivered by a manager.[8]
One should make a clear distinction between fixed and variable pay. The fixed salary should be seen as a compensation for the expected value of the function. In addition, the variable pay to be seen as compensation for proven added value of the function.
If we look from this perspective it is important that an organization must know when a proven added value has been obtained. This approach has a direct relation with the positioning of banks in the market. The reason why banks exist, lies in delivering value to customers by offering financial products and services. The customer must first be made.
If you use this approach, in which bonuses are linked to proven added value (for customers) will be market-based bonuses and better reflect the long-term vision of a bank. If a bank insight of its added value (long term), can be given to fill the variable. Here, the variable remuneration structure particularly well measured and this should be stated in clear performance objectives. These measurements should focus on performance in the long term. ING & Fortis bank, these policies have also been introduced (on the recommendation of the Maas). If you are the policies of these two banks ‘now’ look, then it falls directly on that one intends to propose to the customer.
Maas Committee
Maas Committee, the committee that is set by the Dutch government to the banking system in the Netherlands under the microscope, released in April 2009 a report with recommendations to the banking system.[9]
To begin with, they have a recommendation on the banking supervision. Thus, the commission found that supervisors have the power to a bank to impose additional capital requirements, but this rarely took place in practice. Given the bankers’ behavior, we can conclude that the regulators have failed. The committee indicated that there should be more supervision on banks. The supervisors, all transactions which will be closely monitored to keep.
Second, it advocated Maas, a bonus of a banker, never exceed the annual salary that he deserves. One must also distinguish between a ‘short-term variable income’ and a ‘long-term variable income. A short-term variable salary is focused on the objectives achieved within a year. The long-term variable salary is focused on the objectives achieved in several years. Furthermore pleaded Maas Committee for the payment of the income variable to change. Thus, one variable income in the year of assignment only pay for up to one third. At least two thirds of the income variable is reserved and is preferably only after the fourth year (not earlier than 3 years) paid. All this to prevent people abuse this variable incomes.[10]
Conclusion
Returning to the question: ‘ Is it necessary to present the reward system of the banks to change to make it morally acceptable? “
The discussion about the reward systems of the banks was created in autumn 2007. The result of this discussion was the collapse of the housing market in the United States. The symptoms of the bad behavior of the bankers was getting publicity. The credit crunch was the straw that broke the camel.
In society, the emotions of the citizens on the bankers behavior set off. The directors of large financial institutions generally acted ‘only’ own interests. In the literature we can see that the reward system of the banks consists of two components. So working with banks, namely fixed and variable income. The problem lies mainly in the variable income.
The reason that banks operate with a variable income, is that there is a conflict between the directors and the shareholders of the banks (Agency theory). In order to ensure that drivers are pushing for a good result, there are incentives. The directors are motivated by performance-based rewards, the variable incomes. Performance-reward also has its drawbacks. Thus there are drivers who abuse these high incentives. The directors are then directed transactions take place at the highest possible return. Usually, as we have already indicated, these were high-risk transactions. In the short term it was very attractive to such transactions to take place, but given the long term it was just very discouraged. Thus, billions of dollars distributed to directors of large financial institutions, while they do not deserve. Morally, we can say that the current reward system is unacceptable.
The governments around the world believe that the current remuneration system should be changed. They have numerous committees to answer to the question how the current compensation system needs to change to yet morally acceptable. Maas Committee, presented a report with recommendations to the banks in the Netherlands. Thus argued the Maas that more control should be on the benches. And mainly enhanced monitoring of the transactions that take place there. Second, the Commission argued that Maas a bonus of a banker, never exceed the annual salary that he deserves. And finally, the banks have to distinguish between a short-term variable salary and long term variable income.
In short, we can conclude that the current reward system is morally unacceptable. And it is necessary in order to implement changes in the current pay system. The recommendations of the commissions may pay the current morally acceptable.
Bibliography
* ‘Dark cloud over U.S. housing market. , 2007. ‘ De Volkskrant ‘, 15 August,
http://www.volkskrant.nl/archief_gratis/article592554.ece/Donderwolk_boven_huizenmarkt_VS , (downloaded on January 20, 2010).
* ING receives capital injection. , 2008. ‘ De Volkskrant ‘, 19 October, http://www.volkskrant.nl/economie/article1080070.ece/ING_ontvangt_kapitaalinjectie , (downloaded on January 20, 2010)
* Den Butter, FAG. , 2009. Drift in response to austerity bankers madness: The crisis policy of the Balkenende IV, Journal of Public Finance, Volume 41-page 244-246.
* Taleb, Nassim Nicholas. , 2009. “How bank bonuses let us all down. Financial Times 24 February.
* Sinclair, Peter, Guy Spier, Tom Skinner. , 2008. “Bonuses, Credit Rating Agencies and the Credit Crunch.”
* ‘Goldman Sachs prepares for biggest bonus ever. , 2009. RTL-Z , 15 (Downloaded on January 10, 2010)
* Obama wants U.S. banks to curb. 2010. HLN-Economics , 21 (Downloaded on January 22, 2010)
* ‘Bonus Structure. 2010. Function Bank http://www.functiebank.nl/financieel/52-Bonusstructuur.html , (downloaded on January 18, 2010)
* Cees Maas, Sylvester Eijffinger, Wim van den Goorbergh, Tom de Swaan, Johanneke Weitjens ( Maas Committee) . , 2009. ‘Restoring Trust’, 7 April
* Cees Maas, Sylvester Eijffinger, Wim van den Goorbergh, Tom de Swaan, Johanneke Weitjens s ( Maas Committee) . , 2009. ‘Restoring Trust’, 7 April, page 22-24.
[1] ‘Dark cloud over U.S. housing market. , 2007. ‘ De Volkskrant ‘, 15 August, http://www.volkskrant.nl/archief_gratis/article592554.ece/Donderwolk_boven_huizenmarkt_VS , (downloaded on January 20, 2010).
[2] ING receives capital injection. , 2008. ‘ De Volkskrant ‘, 19 October, http://www.volkskrant.nl/economie/article1080070.ece/ING_ontvangt_kapitaalinjectie , (downloaded on January 20, 2010)
[3] Den Butter, FAG. , 2009. Drift in response to austerity bankers madness: The crisis policy of the Balkenende IV, Journal of Public Finance, Volume 41-page 244-246.
[4] Taleb, Nassim Nicholas. , 2009. “How bank bonuses let us all down.” Financial Times , 24 February.
[5] Sinclair, Peter, Guy Spier, Tom Skinner. , 2008. “Bonuses, Credit Rating Agencies and the Credit Crunch.”
[6] “Goldman Sachs is preparing for the biggest bonus ever. , 2009. RTL-Z , 15 (Downloaded on January 10, 2010)
[7] “Obama wants U.S. banks to curb. 2010. HLN-Economics , 21 (Downloaded on January 22, 2010)
[8] “Bonus Structure. 2010. Function Bank , http://www.functiebank.nl/financieel/52-Bonusstructuur.html , (downloaded on January 18, 2010)
[9] Cees Maas, Sylvester Eijffinger, Wim van den Goorbergh, Tom de Swaan, Johanneke Weitjens ( Maas Committee ) . , 2009. ‘Restoring Trust’, 7 April
[10] Cees Maas, Sylvester Eijffinger, Wim van den Goorbergh, Tom de Swaan, Johanneke Weitjens ( Maas Committee ) . , 2009. ‘Restoring Trust’, 7 April, page 22-24.
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