For many of us, this is the first year that the annual bonus round will be (supposedly) tempered by salary increases. In some cases, these have been substantial. Are they a good idea? I think not. Here’s why.

An army of drones

Lets look at the extreme case of a fixed salary and no bonus - what does that do to incentives? Sure, the incentive to take on excessive risk is gone, but so is the incentive to perform - you create a drone who will do the minimal required to maintain their fixed salary.

OK, there may still be some incentives e.g. promotion, salary increases etc., but they exist only at certain points in a career and once people reach MD the focus will become one of perpetuating an annuity for as long as possible, not on out-performance. One of the basic tenets of good compensation is pay for performance – how is that possible with a predominant salary compensation policy? Short answer: it isn’t. There are other ways to control risk taking, but replacing bonus with salary is throwing the baby out with the bathwater.

The wilder outer fringes

Even if you are happy to lose the positive elements of the bonus culture to eliminate excess risk taking, the reality is that the risk taking that you are seeking to control really resides with a very small percentage of the personnel base. I bet that if you were to analyse the number of individuals in any institution that were really accountable for the vast bulk of losses throughout the crisis you'd be hard pressed to find an organisation where you could count more than 100. So, given MD salaries historically have been £120K - £150K and bonuses of the real risk-takers have been multiple 7 or even 8 figures, doubling salaries (the high end of the what we’ve seen so far) doesn’t even come close to meaningfully changing incentives where it matters most.

A swifter death

Double the truly non-discretionary fixed cost base of their platforms and everyone's job has just become much more expendable – it’s the same economic principle as a minimum wage ultimately costing society jobs (but without the compensatory moral arguments). There were plenty of cases of MDs and Ds who got zero bonuses last year but kept their jobs. Double the salary levels and I suspect many of those will not be so lucky next time around.

Increase salaries? Sure, let’s reduce pay for performance among 99% of the workforce, have negligible impact on the risk taking incentives with those for whom it matters most, and weaken everybody’s job security. Sounds like a great idea.