· 2 min read · Features

Reward without risk is an outrage unacceptaple


Lehman Brothers demise must force a rethink in rewarding risk-taking with other people's money.

Have we seen the beginning of the end of greed as the main driver of business performance?

The demise of Lehman Brothers is not just a major event in the global financial services industry but will resound around boardrooms across the world for some time to come. Whether we do anything about its implications will, I think, come down to how leaders in HR as well as CEOs use it to change the culture of personal aggrandisement that has discoloured private-sector remuneration over the past 15 years.

I have made the point before in this column that the differential between the leaders in business and those who are led has spiralled out of control. Since 1997 the value of the package paid to the average CEO in the UK has increased five times and in the US by over 10 times in comparison to the value of that earned by the average employee.

Until 2007 Wall Street firms were paying themselves about $30 billion a year in bonuses. These bonuses were distorting real estate markets, driving property prices higher and pulling along in their wake the value of property for the average person. This in turn drove borrowing multiples higher and in turn placed individuals and retail lenders at far greater levels of risk than was good for them.

What is so concerning is that this wealth was created on debt, not the trading of goods or services. Even worse still it was based on the packaging up of debt into complex financial instruments designed by very bright people who created a way of selling a mathematical model as a product.

These whizz-kids are the modern equivalent of the tailors in Hans Christian Andersen's tale of the emperor's new clothes. The emperors today are the executives and traders in New York and London, the bankers who trusted them and the regulators who trusted them in turn.

Unlike the emperor, however, a rather greater punishment has been meted out than personal indignity and embarrassment. Not to the traders, bankers and others, however, who may have lost jobs but do so with the underpinning of significant wealth. It is the little people who will suffer the most: the cleaners and secretaries and administrators who relied on their salaries to pay their overinflated mortgages, the small investors who owned shares and anyone with a pension or pension expectation based on capital and income growth.

All investment bubbles burst and this is the market at work to correct itself and restore equilibrium. This, however, differs in one significant respect from the great bubbles of history: tulips, South Sea prospecting, railroads and the like right up to the dotcom boom of the last decade. In these corrections those who got hurt the most where those who invested and put at risk their own wealth in the hope that it would grow. The vast majority in these circumstances knowingly invested their money even if they didn't understand the degree of risk. The debt and derivative bubble was driven by the few investing other people's money in instruments of such high risk that George Soros has called them instruments of mass destruction.

The motivation in organisations such as banks and insurance companies to take such risks with other people's money was simple: greed. Greed fuelled by the growth of the most appalling remuneration principle of all: short-term growth at all costs incentivised by the prospect of becoming rich through taking risks with no personal consequences. This is not capitalism: it is a significant distortion of the market. It is reward without any risk, riches without hard work. It is unacceptable.

It is time for HR to show some spine and some leadership: we need to replace the excess with what the shareowners would regard as fair reward. If we don't do it, I have a feeling it will be done for us.

Chris Bones is dean of Henley Business School.