When they released their five rules for bonuses, I was worried that they were getting involved in a hate-auction rather than trying to design sensible policies.
Ben Chu of the Indie took the other view, saying “I think I prefer it when sales people are paid a fair wage and have some professional pride in the quality of the goods they’re selling – not when they’re desperate to make the tills ring in order to pad out their salary”.
My general view is relatively hands off; in 99% of cases, how employee X is paid has no wider social impact and is just a tussle between shareholders and staff. Classic principal-agent. There are reams of MBA thought on how to do this well. To little avail. Clearly they still often screw up, and it is a mystery to me how shareholders get it wrong so often. My favourite example is always Bob Nardelli, accused of having an obsolete management style and yet still cleaning up. But investors were furious there, and it was their problem, their money (like Dillow, I have long thought this was about power).
But sometimes you need pay structures that move flexibly, rather than being nailed to some mast called “fair”. [Fair from whose point of view? When employee A thinks he is paid less than B who is a dufuss, A thinks it is unfair. Telling him he is paid in the top 1% doesn’t help. I know. ] It shifts the risk onto the employee. It doesn’t necessarily make them do the sort of near-criminal things that Chu links us to. Intelligent management and a reasonable deferral of bonuses, equity participation, and a good culture ought to diminish outrageous scandals – and is in the management’s interest to do so.
But Nick and Vince clearly think this area needs the government to help the shareholders along. As the Financial Times writes, “his polemics against bankers – “pin-striped Scargills” as he has dubbed them – and their bonuses inflame rather than inform debate.” In their broader summary, they say:
An unsavoury mix of populism and seemingly easy fixes. The more serious proposals for splitting up big banks and imposing a levy on profits are flawed but deserve consideration, if done on a global basis. There is nothing liberal or sensible about a draconian clampdown on bonuses.
But the trouble with Vince is that he is very good at two things: the biting memorable soundbite (Scargills, elephants in the room*, Bean-Stalin, etc), and more nuanced, detailed analysis. At both of these he beats the competition. The latter was in display when Michael White interviewed him for the podcast. I transcribe:
“We’re not against the City – there are a lot of very good companies in the City, which make money, provide employment and enrich the UK …The problems related to one specific segment of the City which were the banks – and not all the banks, some banks HSBC, Standard Chartered were not involved in this it was a handful of banks, mortgage lenders and other irresponsible lenders that were at the heart of this catastrophe … I spend a lot of time in the City, I get quite a respectful audience because I think an awful lot of people in the banking system realise they fouled up, seriously, caused enormous damage not just to their own institutions but to others.”
It’s 10 minutes in, and suggests there is a more nuanced view behind the bluster. But the bonus policies, as they stand, would hit the responsible HSBC man setting up a valuable new network in the Far East as well as the daft and mendacious CDO punters. I think, like some other policies**, these would be honed and toned down in office.
There are huge issues in injustice in the world of banking. Bankers make too much money. The Brilliant Andrew Smithers*** has a letter explaining how in much more forensic detail: it is because banks are oligopolistic, not because of the bonus system. This is worth reflecting on at length:
If a subsidy is received by a fully competitive industry, the result will not be a higher return on equity in the industry, but an otherwise unjustified increase in its size. If a subsidy is received by an industry that engages in rent extraction through oligopoly, then its profitability is enhanced by the subsidy, which enables the boosted level of profits to be earned on a reduced level of equity. The case against large financial institutions is first that they are rent-gouging oligopolies and second that these activities are subsidised by taxpayers.
If you make ‘too much money’ because of hidden subsidies and monopolistic market structure, it will find its way to powerful staff. Work on those things, then you can worry less about bonuses and their ilk.
*Apparently a zoo refused to let them use one
**My major beef remains this Unfairness thing with regards to tax and benefits (as the Chris Giles link also argues). Look at Slide 11. Repeat: Labour did Significant Redistribution. And going on about the bottom decile leaves them open to the charge from the Left that their flagship 10k threshold policy is not an answer to this specific ‘unfairness’
*** Finally emerging from the shadow of Mr Burns