COLIN MCLEAN

Few tears have been shed over recent high-profile bank departures. Rich rewards go a long way to compensate for abrupt exits. And, given the huge write-offs following the credit crisis, it is clear new leadership and direction are needed in many banks.

However, even though the full consequences of the credit crunch are not yet known, investors can already learn from what has happened.

Failure to align rewards with long-term success is not just bad value, it can actually lead directly to risky strategies.

Clearly, it is important to understand management incentives, but how can investors spot the risks?

It is now evident that many investment banks took on excessive risks in recent years, earning generous annual rewards for all involved.

However, much of the profit from complex financial instruments, based partly on sub-prime US mortgages, was illusory.

Write-offs have scrapped many years' profits. Yet, with much of the reward linked to those dubious reported profits, rather than through long-term business value, there is little penalty now for failure.

It is hardly surprising that many bank business strategies were built round this tilted mode: rewards for steady progress in reported profits, no real penalty for a big failure.

Benchmarking and measurement of performance has now entered most areas of society, from education to utilities. In many of these there are simple measures of success.

For fund managers, it is performance relative to the stock market index over the medium and long term. Yet surprisingly, stock market performance of many large companies - not just banks - has been poor for several years.

In the major pharmaceutical companies, for example, a gulf has opened up between incentives and stock market performance.

GlaxoSmithKline, the UK's fifth-largest listed company, has underperformed the stock market averages for many years.

Relative to the FTSE All-Share index, the share price is well behind over seven years and is no better than it was 20 years ago.

Yet the chief executive's pay in 2006 was £2.6m, with share sales in August this year totalling £5.7m. That leaves shares worth 14 times his basic salary. The last major merger boosted bonuses, but has delivered no lasting benefit for shareholders. Now the company has announced a plan for job cuts.

The underperformance may not have been as dramatic as the recent bank sell-off, with Glaxo's unremitting relative decline failing to hit the headlines. But these shares, as with those of its competitor, AstraZeneca, are in many investment portfolios.

Surely, the company would be more likely to update its business model if incentives encouraged that.

By contrast, there are examples in the US of chief executives not only foregoing bonuses, but actually waiving their pay for two years or more while a company is turned around.

It builds cohesion in the workforce, and a focus for the needed turnaround.

Instead, Glaxo's last annual report offers the proud boast that 91% of its managers believe that people in their department show commitment to "performance with integrity".

Annual reports are full of information on directors' pay and incentives.

It is tempting to focus on the numbers that companies highlight at the front of reports, but investors should look at the long-term record relative to the stock market averages.

Rewards may simply be pointing a business in the wrong direction.