Bonus row now completely irrational
UTTERLY absurd: that is the only way to describe the debate on bonuses. Here is why. Imagine a salesperson at a widget company so brilliant that she brings in £10m a year for her firm. She is the best widget salesperson in the UK and her firm’s biggest asset. Her company, unfortunately, is loss-making – but if it were to lose her to a rival, it would collapse. Yet according to the current received wisdom, she shouldn’t receive a bonus. Only profit-making firms should be allowed to pay bonuses, we are constantly told, regardless of individual effort and regardless of consequences. The fact that this means she will leave – widgets salespeople aren’t know for their loyalty – and her firm will go bust, with the loss of many jobs, is deemed irrelevant. It’s madness.
Here is another scenario which illustrates the ambient silliness. Imagine a widget firm that pays its staff half in fixed, base pay and the remainder in variable pay. A recession strikes and the demand for widgets slumps. The firm is able to cut staff costs without having to fire anybody; it can still reward stars and survives intact. Now imagine another widget company, run in the way commentators tell us is more prudent. It has slashed variable pay and put up base pay (it tried merely to ditch bonuses, but the staff threatened to walk out, so it had to hike fixed salaries). The recession hits; it is unable to cut costs instantly, starts making redundancies but is crippled by the large payouts needed and by the slowness of the process. It goes bust, all employees lose their jobs and the shareholders lose their shirts.
Badly designed bonuses can trigger stupid behaviour – but well designed ones with deferred and equity components and no payouts for failure needn’t, and an economy with low fixed and high variable costs is more resilient than one with the opposite characteristics. Here is another inconsistency: A banker on a base pay of £10m and zero bonus gains plaudits; his colleague on a base pay of zero and a bonus of £4m is hated. Why? And why does everybody always forget that high salaries in the UK are a joint venture between HMRC and the individual? Even the terminology is suspect: in many cases, what is known as the bonus system (or these days, as the “bonus culture”) is more a revenue or profit share system; it is not meant to exist only or even primarily to reward exceptional performance. The variable component reflects a range of factors – but in the aggregate is a mechanism to divvy up between labour and capital the cash generated in industries prone to large cyclical fluctuations. Contrary to the received wisdom, pay as a share of revenues is not especially high in finance; it is comparable to many other service sector industries.
Regular readers will know that I support real capitalism and abhor bailouts. I don’t think RBS should have been allowed to continue to exist post-crisis. But it was, and the aim now ought to be to get taxpayers’ cash back. Yet the bank is being run to minimise pay in the short-term to score political points (and politicians who once used to stand up for workers’ rights and against shareholders are cheering), rather than being managed to maximise value. The investment bank unit is deliberately being crippled. The pay freeze for thousands of top staff proves the firm is being treated like the civil service. Governments can’t own banks; they always end up destroying them. What a mess.
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