Nama salaries and nationalised bank bonuses. Are they worth it?

Michael Noonan has defended Nama salaries to developers and the payment of salaries and bonuses in state-controlled banks. The banks argue that these bonuses are necessary to ensure optimum performance. Is this the case? By Richard Chambers.

Questions were raised in the Dáil yesterday, about the direction Nama has been taking in financing indebted property developers who have been funded by the agency.

Responding to questions by TD for Kerry South, Tom Fleming, Minister for Finance Michael Noonan revealed that salaries of €70,000 to €100,000 per annum are offered to Nama developers with two exceptions: one developer is paid a salary of between €100,000 and €200,000, and another is paid €200,000.

Deputy Fleming asserted that the public had a right to know who was paid this money and questioned the fairness of such developers being paid such high salaries out of public coffers.

Noonan justified the scale of the salaries paid on the grounds that the developers by saying "They manage billions of euro worth of assets and run them in a very tight situation."

The Irish Times revealed today that Anglo Irish Bank, nationalised in 2009, paid executives €1.2million in bonuses last year.

Internal briefing material from the bank argued that bonuses were necessary:

“On the other side, the elimination of bonuses from all banking activities is not always in the public interest, ie, to hire an individual to complete a task with an incentive payment to do the best job possible in the shortest time to the benefit of all parties.”

At a time when the State is almost bankrupt the contentions of Michael Noonan and Anglo Irish Bank that the State must finance executives at these banks to ensure ‘reward’ for their work as a way of achieving long-term productivity are arguable; more interestingly, a may not be correct.

Over the past forty years, several different research projects into the science of motivation has found that offering greater financial incentives as a reward for greater productivity is not effective. 

Speaking at TED (video below), author and columnist Dan Pink explained that contrary to what we have always heard, bonuses actually lead to a drop in productivity and, in fact, are only successful in physical, repetitive tasks. Behavioural economist Dan Ariely has demonstrated much the same effect, and in a 2009 paper published in the Review of Economic Studies wrote: "With some important exceptions, very high reward levels had a detrimental effect on performance."

Now, former HSBC chief Michael Geogheghan argues that the Government should break the €500,000 limit on salaries it has imposed on AIB in order to attract the required performance to turn around a €30 million portfolio.

The argument of the financial sector here has been that bonuses ensure that the public receives a return on bailouts for nationalised banks. Viewed in the light of this research, however, the promise of increased productivity or better performance may not be a credible one.

Image top: redmonk.