Variable pay is broadly intended as a cash supplement paid in one or more lump sums by an employer to its employees, in addition to base pay, to recognise their superior, sustained contribution to the achievement of the organizational aim and objectives, that is to say to the pursuance of its strategy.
From the reward point of view we have basically witnessed two different approaches with the passage of time: one adopted by the financial sector institutions and the other one essentially embraced by all of the other industries.
The flip side of
the system was that, for uncanny it might appear to be, in the event traders
were not bringing in money for the bank and were rather losing it noting would have
happened. The sooner traders were making money for the bank, the sooner they would
have had their bonuses paid; in case of good performance they received very
large sums of money, otherwise it would have occurred nothing.
Wright (2011) contends that the major risk was not associated with the payment of bonuses for transactions made in the short run, but rather with the circumstance that bonuses were paid before the final outcome of the transaction was known. Deferred bonuses actually existed already, but banks did not have recourse to this bonus payment method in that they would have otherwise immediately lost their talents. What it would actually happen whether Real Madrid, Arsenal or Inter Milan should propose their soccer players a £200K salary a year? Lured by the staggering pay offered by Barcelona, Chelsea and Milan, players would immediately change employer and thus team.
The CRD IV, drafted
in a bid to make more unlikely or less significant the eventual governments
intervention in case of other financial crises, is aimed at introducing regulations
prescribing banks stricter capital requirements and better liquidity
management, basically imposing banks and financial institutions to keep part of
their equity capital and set a ratio of equity to risk weighted assets. The
meaning of these rules is clearly that to force banks and financial
institutions to keep on board some parachutes. The problem is that banks have essentially
to pay for these parachutes, with the immediate consequence that these will
have less cash to invest available to them. In order for banks to continue to
be productive or not reduce the productivity levels to which these are used, these
should attain better ROI rates. All of that, nonetheless, as aptly suggested by
Wright (2011), could have the effect to increase the “temptation” to favour
short-term risk investments.
According to Cotton
(2011), regulations can have a limited effect in that these are invariably retrospectively
drafted, in other words they tend to settle problems which have already
occurred, but are unlikely to prevent the impact which unexpected new circumstances
can produce. The new regulation may thus prove to be ineffective to prevent the
future occurrences caused by different reasons.