Things aren't looking good for big bonuses. Attacked from every side, they have become a lightening rod for criticism of everything from bankers to short-termism, excessive risk-taking and corporate and even public-sector greed. But do bonuses have anything more than a temporary PR problem? Or is something more fundamental happening? David Williams investigates.

The problem with big bonuses is that they are both easy to understand and easy to criticise. While criticism of high salaries has certainly increased during the financial crisis, it appears at times as though opponents to big bonus culture had very little intellectual ground on which to base themselves, in recent years. Then, further along the pay scale, we find stock options. These however can often be so complex that they are more or less opaque to everyone except the company that is setting them. Bonuses are very different: their simplicity means that everyone understands that they ought to be related to performance.

This apparent transparency of purpose has created enormous difficulties for a financial sector that has become used to regarding big bonuses as an inevitable element of the compensation culture. Big bonuses have two specific vulnerabilities. First, it is easy to argue that they should not be paid to decision-makers in any bank or company that is in receipt of bailout money from the taxpayer; because, patently, these companies were run badly. Governmental decisions to limit or change compensation packages in these newly state-controlled companies inevitably, therefore, create attitudes and set standards that have ramifications in the world beyond.

The second area of vulnerability concerns the recovery in the financial sector and its relationship to the policy of quantitative easing - in which governments create liquidity by buying securities such as government bonds from the banks. Many argue that this has created an artificial, taxpayer-backed recovery and that bank bonuses have not therefore been genuinely earned. This concern, that private profits are being derived from public money, has now spread beyond the financial sector and into the public services. For example, civil servants in the UK's Ministry of Defence were pilloried in November for receiving bonuses when front-line soldiers did not.

Too ingrained?

So is the negative attitude towards big bonuses likely to be temporary? The first point to make about the long-term outlook for bonuses is that they are just too useful a mechanism to remain out of favour for long. Tom Murphy is former group vice president at the Kroger company, the largest retail grocer in the US, where he was responsible for human resources and labor relations, and primary contact with the board of directors' compensation committee. He is currently a Markley Visiting Professor at Miami University's Farmer School of Business.

Bonuses are too ingrained at every level to be abolished, he argues. They affect the performance of everyone from the bank teller to the CEO, and they are particularly useful in times of uncertainty when employers want a lot of flexibility in respect to their payroll.

The political dimension
The second consideration is political. Certainly, there is a lot of public anger at the moment; and, given the level of consumer debt and the habit for borrowers to blame lenders for their predicament, it is unlikely that the good times are going to return quickly enough to quell that anger. It therefore seems likely that politicians who articulate and represent this anger will attract a following, and that mainstream political leaders will need to talk tough on financial-sector bonuses in order to head off any loss of votes to more extreme parties. To some extent this is happening already, but, despite the noise, it is unlikely that anything draconian will happen. In the West, the fundamental argument that it is not the state's role to dictate the mechanism by which a private company chooses to compensate its staff remains unassailable.

Into the longer-term
The most likely scenario is that reputational issues rather than regulation will dictate a short-term softening in big-bonus culture as organisations seek to mollify public opinion. However, it is also likely that performance-related compensation at the executive level will shift to the longer-term and that bonuses lower down the organisations will have to follow suit.

Professor Jeffrey Coles is an expert in executive compensation at the W. P. Carey School of Business at Arizona State University. He has recently been interacting with Kenneth Feinburg, the US Treasury's special master for executive compensation and the person in charge of determining pay packages for companies in receipt of money from the Troubles Asset Relief Program (TARP).

I think matching compensation payouts with the decision horizon makes absolutely good sense, he says. In this way, after executives make investment decisions, compensation is only paid out when you find out if they are good decisions. There needs to be a clear line of sight for the decision maker between his or her actions and the performance measure.

The war for talent

So bonuses are going to stay. They will be smaller for a while, and, in the future, perhaps better matched to longer-term results. There is also going to have to be a change in rhetoric. For the last decade, any discussion of remuneration has been dominated by the concept of the war for talent: the idea that managerial and executive talent is rare and that in order to find and keep it organisations have to make sure that this talent is very well rewarded. The financial crisis has created a rhetorical challenge to this justification for high salaries and big bonuses.  The essential question - if the bankers were so talented why did they get us into this mess? - will remain pertinent for a long time and cannot easily be dismissed.

The financial sector shrunk to size?

There is one further factor that needs to be taken into account. Short-term political calculations aside, the regulatory and governmental response to the crisis is not necessarily over. Stabilising the banks and making them profitable again was only ever stage one. Stage two was always going to be a rewriting of the international financial system in a way that reflected the awareness that the financial services sector has been too profitable, was too big to fail and so needs to be cut down to size. In the long term, if anything is to kill off the culture of big bonuses, it will be this.