Banker Pay Theory Disputed by Harvard Professor’s Swedish Study

Published On July 15, 2020

Harvard Business School professor Dennis Campbell’s study on compensation strategies has uncovered a model that questions how well bonuses drive results. At Sweden’s biggest bank, Svenska Handelsbanken AB, he found highly motivated employees, high return on equity, and low loan losses, despite almost no bonuses for employees. The question then is if it wasn’t the money, what caused the bank’s success?

Campbell has written two case studies on the Stockholm-based lender in the past five years that challenge conventional corporate wisdom. What struck him the most about Handelsbanken was how flat its corporate hierarchy is and how important branch managers were to its progress. His study concludes that the bank has created “a very strong culture organization,” which does more than bonuses to bring long-term profits. 

Regulators have been wary of banker bonuses since the 2008 financial crisis and are increasingly pressuring the industry to show restraint and instead use surplus cash for loans to businesses. Handelsbanken stood out for its ability to keep impairments low, which Campbell attributes to its broad network of branches where local staff know their clients better than most in the industry. About one percent of the bank’s employees receive some form of variable pay, but it is offered “with great caution” and not to employees who can have a “material impact” on the bank’s risk profile. 

Campbell’s study showed that, despite the lack of personal enrichment, the bank’s branch managers appeared to “really care deeply” about the cost-to-income ratio. Handelsbanken does offer a profit-sharing plan, the Oktogonen Foundation, which holds a 10 percent stake in the company, but employees have to wait until they turn 60 to see any of that money. The main takeaway, according to Campbell, is that the bank’s culture reduces the risk that employees will chase short-term gains without considering long-term ones, which, if done properly, is a more potent way to generate profits. 

Many in the banking industry complain that such payment restrictions make it hard to attract the right talent. Campbell believes Handelsbanken disproves the link between bonuses and performance, “here’s this bank that has operated this way since the 1970s and has had higher returns on equity than its peers, not just on average over those years but literally every single year, going back that far, and has also had a fraction of the loan losses of their competitors in any given year, including in years where there were major economic crises.”