BANKING CRISIS OF 2008
However, while trying to achieve them using any development strategy or reward strategy concerning employees, there are certain problems and pitfalls highlighted below:
- An economic situation as an external economic environment impact on the effectiveness of reward strategies (Tahmincioglu 2004);
- Fraudulent nominations, which means that organisers are bias on nominations or rewarding undeserving individuals, however, an assessment should be credible;
- Maintaining vibrancy, which according to IDS (2002), presupposes that a successful employee recognition scheme should be taken as ongoing projects, since these schemes have a limited shelf life, and employers should come up with new reward systems: Tahmincioglu (2004) says that nomination-based awards are not effective in the long run, and schemes need refreshing;
- Tax and small print-rewards should not be too procedural or involve taxation;
- The value of the scheme should be inclusive, if not, employees will see it being fair (IDS 2002)
LESSONS FROM BONUS CULTURE
The banking crisis of 2008 is also known as the Global Financial Crisis. Others refer to it as the Second Great Recession. It is considered by economists to be the worst financial crisis in the recent times. It was a global crisis, which began in the USA with the drop of the dollar in value. This financial crisis resulted in:
- The collapse of large financial institutions, such as banks;
- A long period of unemployment;
- The closure of banks by national governments;
- A decline in the stock market;
- A Tremendous drop IN stable economies of the world;
- Numerous evictions of companies in stock exchange markets;
- A failure of prominent businesses;
All the above led to a severe global recession, which slowed down the economies of all affected countries. This crisis was a result of the following:
- Taking high risks by organisations;
- The failure to regulate the flow of cash exchange;
- Hidden conflicts of interests;
- Complex financial products.
However, the recession ended in the period between 2008 and 2009. In their surveys, various economists and other scholars pinpointed that one major reason for this Great Recession was a risk-taking bonus culture. Commissions that were set up to look into this issue or crisis also said that the bonus culture had a hand in the storm of the financial crisis. This was caused by:
- Excess bonuses: this bonus system went far beyond the normal way of rewarding and even became a primary business;
- Institutions took huge short-term returns, which were avenues for a heavy and rich pay-out;
- Bonus schemes encouraged risk taking;
- Cash bonuses were given without considering its long term effects;
- Remuneration practices were not enforced.
From the points mentioned above, we have drawn certain conclusions and learnt more concerning rewarding employees. Bonus is one of the ways of rewarding employees. The bonus culture is healthy, but it should be applicable after a long-term profit is achieved, or when a business has returns at hand.
Some employers motivate their employees by paying them excess money not inclusive of the salary. Others give Christmas coupons at the expense of the business, which should not be the case, while others are given free bus tickets. The bonus scheme should not be used at the expense of shareholders or the business.
Cash bonuses should be used only when short-term effects will not be felt by an organisation, and the business should not strain or go in debt, because of the bonuses given. They are mostly used when the profit margin is wide.
It is healthy to use the bonus scheme, but bonuses should be realistic and reasonable, but not given in excess. This may be because of showing off or trying to attract potential employees and aiming at retaining the existing ones. This may be used as an incentive to lure others into a business to step on competitors. It will make the business or the organisation have very huge debts, if it is not careful with its expenditures.
Institutions or business organisations should not take huge gambles, because it may put the business at risk, especially if it loses in the same. They should not engage in gambling also because the returns gained may be short-term. They should consider long-term achievements or goals (The Telegram 2009).
The bonus scheme is a big risk, and organisations should critically analyse its pros and cons, and if it is affordable, before embarking on it as a method of motivating its employees. Businesses, which are not fully established, should avoid this method, while the established ones should trade carefully.
Before using it, they should ensure that the employment percentage is high and household incomes are stable. The economic growth should also be stable, and remuneration should be done to assess its performance.
When the bonus scheme of rewarding employees is used, it may backfire on the business. It portrays a negative public image of a business or an organisation, which in turn turns away potential employees. It also gives competitors an upper hand over a business and may easily lure one’s employees into quitting the former job and joining it.
Negative effects felt when these reward methods fail could discourage or make potential investors shy away. This is because they perceive a business as a big risk for their investments. This method may be successful, though for other organisations.
IMPLICATIONS OF THIS REWARD STRATEGY IN THE FUTURE
The risk-taking bonus culture associated with the banking crisis of 2008 has impacts on the future of reward strategies in organisations. This paper analyses the implications it will have during the next five years.
- Organisations will reduce the level of motivation of their employees for the fear of incurring big losses. They will particularly avoid the bonus scheme, since they witnessed its results during the Great Recession. Newly established businesses or organisations will be careful not to make mistakes that their predecessors have made.
- The reward strategy will lead to bonus deferral, whereby bonuses will not be paid early on the basis of predicted future profits. Bonuses will then be deferred in line with activities for at least five years, until profits are actually earned.
- This strategy has led to the creation of new laws to regulate reward strategies implemented by businesses or organisations, such as laws bailing out bank directors. They receive no bonuses, until a bank repays and cleans out the mess portrayed to the public during the great recession. Other bankers’ bonuses are also capped.
- They will take new measures, for example, there will be the provision of fixed salaries. The main objective of this measure is to reduce the temptation of taking risks, such as rewarding before knowing the profit. The history would repeat itself, if losses were to be realised, when the organisation had already rewarded its employees.
- Another implication it will have is that cash bonuses will be limited to a small share, as compared to the previous time, when the amount of bonuses was larger and bigger. This is because of short-term effects it may have on the business as opposed to long-term effects, which are more serious.
