In the aftermath of the global financial crisis, discuss whether there should be enforceable limits placed on bonuses that

can be earned by the employees of financial institutions.

Name:

Nitish Jalali

Student ID:

30573208

Word Count:

746

Introduction
According to Michael Armstrong (2002) Incentive is said to be any factor which is either financial or non-financial that ensures a particular course of action. Incentive expectation guarantees positive employee behaviour, which in turn encourages maximisation of an objective and organisation success.

Capping Bonuses would cause exodus - For the ones who don¶t deserve it!!
Placing a limit on bonus would lead to a huge hue and cry amongst the Key Employees discouraging them; as a result of this company would face a significant competitive disadvantage. If bonuses are capped there would be an increased risk on the company as this would limit the bonus available to key employees. The financial institutions need to ensure that they retain the best talent there is and the only way to do so is by rewarding them. Capping Bonuses wouldn¶t be the solution as the financial sector is a huge industry and the best employees would eventually move where the best deals are found. http://www.guardian.co.uk/business/2009/dec/02/rbs-warns-over-bonus-cap, Phillip Inman, Wednesday 2 December 2009; accessed 28/10/2011

Claw-Back Incentives + Cumulative profits
Claw back incentives refers to that situation where in a company withdraws any monetary or non monetary benefits due to certain unforeseen conditions or circumstances. If a company fares poorly during a fiscal year it can claw back the incentives that were to be distributed to their key employees. This incentive could be provided to the employee during the next fiscal year when the company does exceptionally well as cumulative incentives during the year incentive was unearned. This would compensate for the unearned incentive. If the company does fairly well the unearned incentive would not be provided. Companies could instead choose non-monetary means of rewarding their employees so as to ensure they would retain them. A company could let employees choose their rewards based on their likes and dislikes rather than having a standard non-monetary reward. Offering gift vouchers during Christmas or any other festive season, Music concert tickets for those who love music, Food coupons etc.

http://www.investorwords.com/6756/clawback.html; accessed 31/10/2011 http://www.businessweek.com/managing/content/apr2009/ca20090424_985238_page_2.htm , Matthew Boyle, 24 April 2009; accessed 31/10/2011

Pay as you perform
Incentives should be given to employees based on their individual performance. These act as rewarding factors for company¶s best employee thereby motivating them to work harder and efficiently. The incentives that are given should be in form of ³phantom equity shares, restricted stock and bonds´ instead of liquid cash. These non liquid cash incentives should be regulated where in employees are tied to the company and provided with a time restriction to sell. This ensures that the employee is tied to the company for a longer a period of time and incentive provided would be more meaningful. The non liquid cash incentives would be comparatively better when compared to liquid cash as they would be regulated and the employees cannot walk out of the company after receiving the incentive. The incentive should be based on a long term performance rather than short term. Phantom equity ± refers to a contract between company and key employees wherein the company transfers a certain amount of stock units to key employees. It provides benefits of stock ownership without actually owning company stock. The advantages to employees are that he neither spends on buying stock nor does he lose money during the price fall. No tax declaration on the income earned through this and 100% risk on the owner. Restricted Stock ± type of equity incentive wherein the entire stock is issued at once, with restrictions which involve forfeiture of the same if the employee ceases to be with the company for a certain period of time. On the maturity of this time period the employee can convert these stocks to cash. Bonds ± issuing bonds with a time restriction to sell so as to realise cash could also be employed by the company this ensures that the employee is tied to the company, benefiting both the company and the employee. http://www.fwlaw.com/tabid/487/Default.aspx , John A. Leonard; accessed 31/10/2011

Conclusion
Capping bonuses to your key employees would definitely not be the right step ahead for financial institutions. Instead these companies can take up alternative solutions to reward their employees when the company underperforms or fares poorly i.e. claw back incentives and provide non monetary benefits or provide cumulative incentive for exceptional growth compensating for unearned incentive. Also incentives should be paid out to the employees who deserve it or performing employees (key employees), this could be either in form of liquid cash or equity instruments.

References 1. Armstrong, Michael (2002) Employee Reward, CIPD House
2. http://www.businessweek.com/managing/content/apr2009/ca20090424_985238_page_2.htm , Matthew Boyle, 24 April 2009; accessed 31/10/2011 3. http://www.fwlaw.com/tabid/487/Default.aspx , John A. Leonard; accessed 31/10/2011 4. http://www.guardian.co.uk/business/2009/dec/02/rbs-warns-over-bonus-cap, Phillip Inman, Wednesday 2 December 2009; accessed 28/10/2011 5. http://www.investorwords.com/6756/clawback.html; accessed 31/10/2011

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