The Absence of Incentives to Manage: How the Wrong Incentives Resulted in Absent Management

Abstract

Incentives have been a central part of managing banks from the Medici to today. Bonuses were awarded for production, being successful banking, and not for management. When banks were mainly partnerships, one incentive for the partners was to keep the bank from failing. Once banks listed on stock exchanges, incentives became shorter term. They were about a high share price of the bank rather than its survival. Annual bonuses became path dependent and difficult to reduce because of the fear of losing hard-working and talented bankers. At times, incentives were so large that the recipients became financially independent within a few years and thereby unmanageable.