Bonuses for purchasing?

Banks have tried to justify huge bonuses paid to employees on the basis that they are performance based – they are linked to the value of loans that are negotiated.

I have nothing against sales-related bonuses. In some businesses, it works very well, and probably it would in banking too, if banks were rewarding selling… but they’re not.

When banks make loans, they are actually buying. They buy your promise to pay back a loan at a future date, and give you cash in return. That sounds like an act of purchasing to me! If we gave bonuses to purchasing departments of shops in the same way, shops would end up vastly overstocked, and would be unable to then sell what they bought. This is practically what happened to banks with loans during the financial crisis. The banks owned loads of loans, but no one actually wanted to buy those loans, since it was unlikely that they would be paid back, but by this point the banker had already taken his bonus and run. The bank, meanwhile, has no option but to stop offering loans (halting purchasing, until it can shift some of its old stock, quite possibly at a loss).

So, what would be the alternative way of rewarding good bankers? By rewarding them at the point they make a sale, rather than a purchase! I.e. when the loan that they issued returns a profit. They could be paid a bonus when the capital has been paid back, for example, or when the total amount of money that has been paid against capital and interest begins to exceed the capital.  The exact details would depend on the nature of the loan in question, and where the risk associated with it is, but as long as the bonus is paid at the time of sale, rather than purchasing, bankers will be more careful to consider whether their purchase is going to increase in value before continuing.

Disclaimer: I’m not an economist, so if you are, and feel I have got this wrong, please comment below. ¬†Actually please comment below anyway, because I always like to hear what other people think!

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