Banking crisis lessons on incentives

17 Sep 2008 by Karl Hallam

Learning from the private sector is something that the public sector is often urged to do. This normally means something about efficiency getting results; the implication is that the public sector should be more like the private. It's not just the CBI who say this kind of thing. Organisations like the Local Government Association quite happily put out press releases saying: 'Councils can learn from best in private sector'. The current global financial uncertainty/crisis must have lessons to offer, too, but perhaps these lessons are more about what not to do.

Cadence has taken an interest in the role of incentives in promoting innovation and it does seem that the banking industry has been very keen on the use of cash bonus incentive systems in recent years. We have no experience of the banking industry and therefore admit to being baffled by the idea of $9.5 billion in bonuses being paid out by Lehman's late in 2007.

But is it really so baffling? Maybe the staff quite rightly got their bonuses because they achieved the targets set for them? Is the problem perhaps that they were not the right targets to aim for in terms of ensuring the bank's long-term success? The parallels with government attempts to performance manage public services are clear and relate to another Cadence theme - the way in which innovation can stall at square one because the boffins fail to identify the correct problem, perhaps by not talking to front line staff and users.

This begs the question: did Lehman's workers realise what they were doing was unsustainable?

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