There are all kinds of political issues surrounding the bonus to Stephen Hester and his decision to waive it. These will not be covered in this post.
Instead, there are some interesting issues on motivation.
Research suggests that a pay increase has only a short-term effect on motivation. Yet some people clearly are motivated by monetary reward, while others are not. The danger is in assuming that everyone is the same.But what most people want is recognition, and that can take the form of money.
Do bonuses work? Properly set up (which includes rewarding the right thing) they can. The effect is potentially twofold: pre-bonus by changing behaviour to achieve it; post-bonus by recognition of effort and a sharing of its product.
Potentially, therefore, the Hester bonus could motivate him to do his job better. But there is a further possible motivation: taking the job in the first place. Why would someone take on a failing bank when they could have a well paid and less risky job elsewhere? If the bank continues to fail, this can destroy the remains of a career. Money can compensate for this risk, and structuring it so that a large part is dependent on success (as defined) leaves both parties happy. Putting Hester under pressure to give up his bonus thus makes it more difficult to recruit to the bank in the future.
The other issue is how motivated Hester now is. Whatever your view of bonuses, he has fulfilled his part of the bargain, yet has been pressured to give up his reward. I would have been tempted to walk out. Certainly, if I were a headhunter last Monday would have seen me phoning senior staff at RBS and holding some very interesting conversations.