The People Bulletin

The science (or is it an art?) or bonus allocation is back in the forefront of people’s minds again.  Bank bonuses this year will be taxed at 50%.  In an uncommon flickering of the entente cordiale, the French president has announced the same treatment for French bankers.  No doubt the chancellor hopes that those voters whose only contact with banks is via the hole in the wall will see the tax as a righteous visitation on those who only weeks ago were deemed to have taken the country to the brink of ruin.  Bankers themselves are either forecasting the City will move lock, stock and barrel to a more hospitable environment in the deserts of Arabia, or are already instructing their accounts to pull the trigger on one of several obvious routes to avoiding the tax.  The chancellor, no doubt, is congratulating himself on a splendid double bluff.  Yes, he will bask in the congratulations offered by the hole-in-the wall gang; and yes, he will visibly bristle at any suggestion that he always knew the tax was going to be easy to avoid – nudge nudge, wink wink…

This isn’t the only time we have heard about bonuses recently.  The chancellor’s decision to ‘tax’ bankers’ bonuses doused the fire lit by the disclosure that 28 border agency officials received bonuses totalling £295,000 last year, only a few weeks after the announcements that the same agency was contemplating abandoning 40,000 asylum cases because it was too difficult to return them to their own country.  This in turn took attention away from the story that staff at the Student Loans Company received almost £2m in bonuses – many students will have noted that SLC staff have been quicker to collect their bonuses than they have to distribute the loan entitlements to many thousands of students who remain without funds long after they were supposedly entitled.

Pay and performance

The recent bout of bonus bashing should give us cause for thinking about why we should have got ourselves into the habit of paying bonuses at all.  The truth is that bonus schemes, as with many elements of performance-related pay, are very difficult to design effectively.  Indeed, the mechanics of connecting pay to performance are difficult to establish full stop. If you want individuals to be influenced by their remuneration then you have to avoid making their incentive packages too complicated. Too many variables and most human beings will throw their hands in the air and carry on doing what they would have done had they not been given performance-related pay in the first place.  Then the only people to benefit from the scheme will be the consultants paid for setting it up. The fact is that most senior team members’ roles are complicated, and the individuals that hold them are responsible for dozens of variables, many of which sit uncomfortably with each other, if not conflict. To connect remuneration to all aspects of such an individual’s performance is an impossible task. To connect remuneration to just a selection of ‘the most important’ of an individual’s deliverables is to invite dysfunctional behaviour as staff will be encouraged to focus on those aspects of their roles that will increase their incomes at the expense of those that do not. For any senior role, therefore, it can be difficult coming up with individually tailored performance targets. For the really top guys, rather than look for personal targets the sensible thing for many is to look for corporate targets. If the business does well then the individual will do well. This takes us right into the heart of corporate governance of course: if what you really want is to align the interests of directors and the interests of the businesses they lead, make sure directors are rewarded when their businesses do well. But determining when a business does well can in itself be difficult – let alone a not-for-profit government agency. Determining profit is an art, not a matter of fact. And seemingly healthy profits one year might be bought at the cost of the long-term health of the company – hence the row about the bankers.

Alignment

Part of the appeal of bonuses is that they can be taken away when times are bad.  Bunce when times are good and nothing when times are bad is one way of aligning staff with the interests of the ultimate stakeholder.  Such arguments are difficult to justify in the case of public servants; which is why public servants and bonuses are such uneasy bedfellows – historically they’ve rarely shared the same bed at all.  In the case of the listed company the shareholder-alignment argument has some appeal – but it’s fairly superficial.  Paying somebody when a business does well is easy; not paying the same individual when the business does poorly is much more difficult.  Pay is always easier to give than to take away. The same, unfortunately, is also true of bonuses.  One of the reasons bonuses have come back so quickly into banking is that bankers think they can’t do without them, and their employers are only too prepared to believe them.

Of course, much of the fuss about banker bonuses has been generated not so much by the structure of the awards but by their amount.   How many hundreds of thousands of pounds, or even millions, are needed to reward a senior banker or to align a director with his company’s shareholders? When does a bonus or a handout of shares or stock or options cease being an incentive and start just being a reflection of greed on the part of the directors? As well as an indication of the power of the board and its committees to deliver to its staff, and sometimes its own, members enough wealth to safeguard the interests of a director and his family for generations to come, regardless as to whether or not the interests of shareholders or any other stakeholders have been served? When an individual is earning as much from a listed business as some bankers were in the heady days before the crash, even if a large part of the remuneration is in the form of shares, it is misleading to suggest that his interests were being aligned with those of his shareholders. To many, bankers’ remuneration was at the expense of their shareholders, not to forget the public – and that was even before the banks they led went bust.