{"id":415851,"date":"2020-07-18T13:00:39","date_gmt":"2020-07-18T11:00:39","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=415851"},"modified":"2020-07-17T16:24:04","modified_gmt":"2020-07-17T14:24:04","slug":"new-study-questions-how-bonuses-affect-performance","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/banking\/415851\/new-study-questions-how-bonuses-affect-performance\/","title":{"rendered":"New study questions how bonuses affect performance"},"content":{"rendered":"

A Swedish bank may be about to change perceptions of how bonuses affect performance.<\/p>\n

Dennis Campbell, a Harvard Business School professor, has been studying how companies design compensation strategies.<\/p>\n

His work led him to the biggest bank in Sweden, Svenska Handelsbanken AB, which he says uses a model that raises serious questions about how well bonuses drive results.<\/p>\n

Handelsbanken caught Campbell\u2019s attention about five years ago. Since then, he\u2019s written two case studies on the Stockholm-based lender, and his conclusions challenge the conventional wisdom.<\/p>\n

Campbell says staff at Handelsbanken were highly motivated despite the absence of bonuses for all but a tiny group. What struck him was 1) how flat Handelsbanken\u2019s corporate hierarchy is, and 2) how important branch managers are.<\/p>\n

\u201cHandelsbanken just stood out as a really interesting example because they have really unusual levels of empowerment,\u201d Campbell said in an interview via Zoom.<\/p>\n

What\u2019s more, he says the Swedish bank has \u201chad these really unusual performance outcomes that normally don\u2019t go along with that level of decentralisation.\u201d<\/p>\n

The Bonus Debate<\/strong><\/p>\n

Banker bonuses have become an increasingly thorny subject since the global financial meltdown of 2008. More recently, governments and regulators have put pressure on the industry to show restraint on pay and instead use surplus cash for loans to businesses hit by the Covid-19 crisis.<\/p>\n

Many banks have complained that such restrictions make it hard to attract the right talent. But the link between bonuses and performance is hard to prove.<\/p>\n

Campbell says Handelsbanken stood out in part because of its ability to keep impairments low. He attributes that in no small measure to a broad network of branches at which local staff know their clients better than most in the industry.<\/p>\n

Coincidentally, Handelsbanken has placed less emphasis on automating a lot of client-facing services than some of its peers.<\/p>\n

\"\"<\/a><\/p>\n

\u201cWe would normally think that the level of decentralization that they have … would lead to things like higher loan losses, would lead to less efficiencies in their cost structure,\u201d Campbell said.<\/p>\n

\u201cYet here\u2019s this bank that has operated this way since the 1970s and has had higher returns on equity than its peers, not just on average over those years but literally every single year, going back that far, and has also had a fraction of the loan losses of their competitors in any given year, including in years where there were major economic crises.\u201d<\/p>\n

About 1% of Handelsbanken\u2019s employees, mostly in investment banking, receive some form of variable pay, according to J\u00f6rgen Olander, head of compensation and benefits.<\/p>\n

But it\u2019s offered \u201cwith great caution\u201d and not to employees who can have a \u201cmaterial impact\u201d on the bank\u2019s risk profile, he said.<\/p>\n

In the first quarter, Handelsbanken booked smaller impairments than any other major Nordic bank.<\/p>\n

Profit Sharing<\/strong><\/p>\n

Campbell says his study showed that, despite not having \u201cany skin in the game\u201d in terms of personal enrichment, branch managers at Handelsbanken appeared to \u201creally care deeply\u201d about the cost-to-income ratio.<\/p>\n

Handelsbanken does offer a profit-sharing plan – the Oktogonen Foundation, which also holds a 10% stake in the company – but employees have to wait till they turn 60 to see any of that money. That reduces the risk that they\u2019ll chase short-term gains without considering long-term outcomes, Campbell said.<\/p>\n

The main takeaway, according to Campbell, is that Handelsbanken has managed to create \u201ca very strong culture organization,\u201d which, if done properly, is a more potent way to generate long-term profits than a bonus program.<\/p>\n

\u201cPeople are naturally motivated,\u201d he said. \u201cThat\u2019s very different than the assumption that many leaders make.\u201d<\/p>\n

\n

Read: Naspers boss scores R276 million payday<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

A Swedish bank may be about to change perceptions of how bonuses affect performance.<\/p>\n","protected":false},"author":59,"featured_media":274233,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[961],"tags":[15091,26],"class_list":["post-415851","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-banking","tag-handelsbanken","tag-headline"],"_links":{"self":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/415851","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/users\/59"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/comments?post=415851"}],"version-history":[{"count":4,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/415851\/revisions"}],"predecessor-version":[{"id":417605,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/415851\/revisions\/417605"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media\/274233"}],"wp:attachment":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media?parent=415851"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/categories?post=415851"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/tags?post=415851"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}