But that's not how UK bankers' bonuses work. They're not in addition to the usual pay - they're part of it. Pre-crash, banks preferred to keep salary increases to a minimum and to funnel additional pay through bonus schemes. In other words, employees had effectively traded salary increases for more bonuses. When you look at it this way, it doesn't matter whether you have a high salary and a low bonus or a low salary and a high bonus; what matters is what the two are worth together.
Bonuses aren't necessarily high - for the average bank employee, the bonus might be about 10 per cent of their salary. The higher their salary, the greater this percentage. So yes, at the top end, some people got screamingly high bonuses that were several times their annual salary, but they were mostly in investment banks, rather than retail banks.
But another caveat kicks in here: the larger the bonus, as a rule, the greater the proportion is held back to be paid at a future date. Often this deferred element was paid in shares rather than cash. And often, a performance condition was slapped on it - if you resign before it's paid, you forfeit it.
Why pay this way? The stock answer, even within banks, is to attract, retain and motivate employees. Certainly, to recruit or retain people, pay needs to be similar to other employers', and sometimes more. But motivation?
Critics say that bankers' bonuses encouraged excessive risk taking, but for pay to incentivise, you need to know what you have to do and what you'll get for doing it ('line-of-sight'). It also helps to receive the reward soon after you've done the action. But that's not how most bank bonus schemes worked.
First comes performance. What you achieve is important and can be measured; but increasingly, how you achieve it is important, too. This can't be measured, so depends on someone's judgement. You then get a performance rating, and the higher the rating, the higher the bonus. But typically, these are relative - roughly the same percentage of ratings are awarded each year, so your own performance can be trumped by others and your rating (and bonus) squeezed down. Already, that all-important line-of-sight is beginning to look frayed.
Next up is the amount of the bonus itself. Some banks calculate the bonus by using a formula to link the performance rating to the salary. Larger investment banks tried to be more flexible, comparing pay with three things: what you expect, the pay of others within the bank and that of people doing similar roles in other banks. This is then adjusted according to how much the bank wants to spend on all its bonuses, which in turn depends on the performance of the bank as a whole.
Then further adjustments would be made. Often profits were distorted by external factors, so there'd be adjustments for windfall gains and losses. A business plan might be loss-making in the early years; bonuses for that team would be funded by reducing potential bonuses in high earning areas, and so on.
For employees, these discretionary adjustments replace line-of-sight with uncertainty. You can perform higher this year than last yet find that your bonus is less (or vice versa). And being paid in shares just increases the uncertainty.
Dan Pink in his book 'Drive' questions whether bonuses motivate. He points out that in knowledge roles, autonomy (freedom to act), mastery (a realistic challenge) and purpose (belief in the value of the role) shape behaviour far more than bonuses. One reason is that self-motivation (doing things because you want to do them) is much more powerful than extrinsic motivation (doing things for some sort of reward, such as a bonus). So recruit ambitious and competitive people, inspire them with good leadership, point them in the right direction and, as long as they think they're being paid fairly, they'll do the job well anyway, bonus or no bonus.
Why then, are bonuses such an emotive issue for those receiving them? It's all about being appreciated. They spell prestige and self esteem. What matters is not the pay, but feeling valued.
Whether they realise it or not, the real reason banks pay bonuses is flexibility. It's to pay people more in good times and less in bad times. Paying more to those who deserve it, and less to those who don't, helps in managing people. Deferring pay and adding conditions gets their money back if someone resigns. This is not about motivation so much as managing resources efficiently.
Pay in shares and the future value depends on how well everyone pulls together. Employees gain or lose exactly as shareholders do. And, as those who worked in Northern Rock know all too well, you're held accountable because if the bank goes bust, you lose the lot.
