Bonuses do not work. It is not about banker bashing, it is about what actually provides incentives
29 January 2012 6 Comments
Bonuses do not work. The situation with RBS goes to show all too well. The RBS board has awarded the CEO a bonus of £1 million in addition to his £1.2 million salary despite:
- RBS over his term has cut lending to small business as it has continued to de-leverage its balance sheet
- RBS over his term has seen its share price crash by 40%.
- RBS over his term has left the tax payer sitting on an even bigger loss on its 83% stake in the bailed out bank, where the break even price is 50p against the current price of 27p.
- RBS has sacked 33,000 of its workers over his term.
- The tax payer is sitting on RBS liabilities of over £1 trillion, which is the same as total official public debt. (Market Oracle)
In this post I highlighted the presentation by Dan Pink where he outlines experiments relating to bonuses and motivation to conclude that where a task requires cognitive skill not only do bonuses lead to worse performance but the larger the bonus the worse the performance. In other words bonuses do not work.
If bonuses do not work, as a party we should look at what does and stop what doesn’t.
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He achieved all the explicit objectives set by the board. So in that sense, the bonus worked. It’s just that none of the things you mention were in his objectives. Perhaps, instead of obsessing about whether or not his pay is performance-linked, it would be productive to focus on why these were not his objectives.
Hi Andrew, good point, perhaps we should be highlighting this in our press releases and media interviews? I haven’t heard much from the Lib Dems this weekend about it. Having said that, Dan Pink’s presentation is convincing that bonuses do not work at all for this type of task and considering the mess that the financial industry has got into, it would suggest that perhaps bonuses are not the best tool to get good results of the type we need.
Bonuses aren’t incentives to the things you list, but to staying in the position in the first place. The skills which are needed to run a global finance company are rare: banks are giving out these bonuses to retain staff who would otherwise defect to companies in East Asia or New York. By that standard, they’re working quite well: I just wish the bail out had been a loan so we could garentee the debt would be paid back to the state.
In the case of HBOS, I’d say with the catestophic slow down of credit for small and medium businesses, it might be time to concider wholley nationalising it as an emergency measure to increase credit flow. It can be re-privitised once we’re all satisfied we don’t need government intervention anymore.
Hi Toby, thanks for the comments. Good ideas and perhaps they should have gone with them. I appreciate that the bonus may have kept him there but I’m still not convinced bonuses work though, not in a real sense of improving things. When we look at the bonus culture and the mess the financial industry got into, it is hard to see how it contributed to a better system. I accept that perhaps bonuses weren’t attached to the right outcomes, but Dan Pink would argue that the performance of people on high bonuses work less well.
The same applies to a great many other skills. Anyone who has been in a particular profession for many years and risen to a top position in it will have skills acquired in that process which are shared by few others. Let us suppose, for example, that the people in charge of refuse collection in all councils across the country said “we have rare skills, we demand to be paid salaries of several million for them, or we shall leave our jobs”. The country WOULD be in a mess very quickly. No doubt there is much you pick up if you have been in the job of refuse collection for years and been good enough at it to rise to the top.
No doubt there are many odd little things a decent Head of Refuse can pick up by insight which someone dropped into the job from somewhere else would miss.
Suppose everyone across the world in charge of refuse collection wherever they were said the same – and organised themselves into multi-national refuse collection corporations, with a rigid policy that you get promotion only if you show sufficient greed and lack of morality that you feel it perfectly acceptable to demand millions to do your job and to threaten to walk out if you don’t get it?
The reality is that the top bankers take this money because they can, no more. They control the way the money flows, and sit and take their cut. Even if the decisions they make are mundane, since it involves very large amounts of money, they can claim to have “created wealth” just by doing their job and therefore to “deserve” huge amounts which is really just their cut of what they handle.
In other parts of the world, those involves in government take the same attitude. Since being a president or prime minister of some other top post inevitably involved handling biliions, they suppose it only right that they should take millions from it. We generally call this “corruption”, and we can note those countries where it happens tend not to be the better governed in the world.
Let’s not be shy about it – the amount you get paid is your employer’s gross profit multiplied by your leverage (and the only subtlety about public sector jobs is that your employer’s “gross profit” is the tax revenue budgeted to your department).
Banking executives get paid a lot because they’re incredibly hard to replace and their employer makes billions. There is nothing more to it than that.