15 May 2012, 7:01am
economy:
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  • Fat Cat wants no Restrictions on Cream

    Well, who’d have thunk it? Boss of Standard Chartered considers proposed European legislation to

    cap bonuses to no more than salary

    as preposterous. Usual codswallop “Bankers claim it could increase risk by leading to higher salaries. ”

    Now I don’t think that’s such a bad idea at all. In fact it’s such a good idea I’m surprised it came out of the European Parliament 😉 Note it is not a restriction on pay. It is a restriction on the balance of pay and bonuses. The trouble with the bonus culture is not that the bonuses are large, it is the total lack of transparency and general moral hazard. The size of the bonus is only known after the fact.

    There are some sorts of people we’ve always incentivised by bonuses, like the salesforce, who usually earn a low base pay and a larger bonus. However, in the not so distant past a decent salary and a modest bonus used to be enough to even get CEOs out of bed in the morning. The reason bonuses work for a salesforce is that the output can be easily quantified over the last year. Whereas the value added by a CEO is the devil’s own job to quantify. We can’t control for all the variables, so the default assumption is that he’s really great at this job. Why does that work for the CEO better than for some middle-management grunt? Because the CEO is the boss. What he says goes.

    Businessweek seems to agree with me. It all started going wrong in the early 1990s, when Bill Clinton favoured bonuses related to performance. Now Clinton was a reasonably sharp cookie, but he achieved an epic fail here. “You get what you measure”, but if you’re in charge of the operation you also “measure what you get”.

    That’s the rotten core at the heart of the whole performance related pay ethos. Who sets the Board’s targets – well they do. Quis custodiet ipsos custodes? So they inflate their pay, and good old Bill gave them the keys to the corporate safes. Company employees at the top have been looting it ever since, quite legally. Maybe it isn’t such a surprise that shareholder returns have been desultory since the dot-com bust, as this legalised thievery gathered pace.

    What Diamond Geezer Bob did for Barclays shareholder value last year.

    Now Diamond Bob might be worth every penny of his £17.7m pay over at Barclays, though some shareholders beg to differ. But wouldn’t it be so much more transparent to say this year we’ll pay him £9m, with a performance related bonus of £9m? It used to be how pay worked, it’s how it works (with the figures adjusted) for lowly grunts like me and everybody else below board level. And we’d see beforehand just how much Barclays is planning to pay it’s CEO.

    Oh and we wouldn’t end up with reckless tossers taking excessive risks because when your bonus is 90% of your pay it incentivises you to bet the farm on nutty stuff that sometimes screws up so much that taxpayers have to bail you out.

    In the end, what’s so wrong with a fair day’s pay for a fair day’s work, with the chance to double it if you fiddle the books right are a talented superstar with extremely rare talents capable of adding serious shareholder value? Shareholders, seeing all that awesome value you added last year may increase your pay this year and up the ante. Looks like a win-win here. There’s nothing wrong with high pay, if it really is necessary. But there’s everything wrong with a lack of transparency and control. It’s the shareholders that capitalise the company and take the risk, not particularly the employees. When Fred the Shred sunk RBS, all he lost was his job, it’s not like he was at risk of losing his life savings.

    Thes Big Swinging Dicks need to relearn these facts of life, and that 50:50 pay:bonus split limit could be a good place to start IMO.

    It seems that the commentariat have been schmoozed and conditioned into discussing the size, format, timing, transparency, control and limits of bonuses – even (sadly) in Suffolk – instead of whether they should exist at all..

    Personally I like to see a better correlation between cash flow and management pay to put shareholders and management on the same sheet. Personally if I was a big wig and I’d just knocked out a blinding performance and if I wasn’t paid competitively I’d go elsewhere so I see the rational, but its just going to go up and up unless a cap is imposed. No one wants to pay massive wages, but they do want to pay slightly more than everyone else to attract the best.

    On another note, should Barclay’s shareholders be unhappy with that performance I’d happily do the job of CEO for a mere £1m a year… that’s a bargain in my eyes.

    I do agree with you though.. pay an income and you get a percentage of that according to how well you have done. 100% if you do a cracking performance and 0% if it is awful.

    Is it a Scam? Is it Legal? Is it Fair?

    1] A Government sets up a National Bank be it private and/or state controlled.
    2] Next they creates electronically, or otherwise a billion currency units.
    3] The National Bank loans the billion currency units to licensed banks A, B & C. at MLR + 1%.
    4] The licensed banks purchase bonds from the government, redeemable over 10/20/30 years at an agreed rate of %
    5] On the security of these bonds, the licensed banks loans 3 or 4 times this amount, to the public, at interest rates between 8-15% +. So the public can buy property, business and material things.
    6] On the profits the licensed banks make, they pay taxes to the Government who licensed them.
    7] These taxes the government spends on whatever?

    Now is this form of banking and/or credit wrong? Or is it just a means of allowing people to buy goods and services instead of trying to barter things that they produce for goods and services other people produce?

    Or has the problem been, we the public borrowed too much, for things that we wanted? So that we could keep up with other people due to greed or envy? After all banks don’t force anyone to borrow from them.

    Credit or money is neutral it is just a lubricant to keep commerce turning, how would you ship 50 sheep, 20 cows etc, to pay for 10 bags of wheat etc, or do your weekly shop?

    The problem as been us, we have tried to satisfy our wants, not needs, also some of us have lacked the discipline and have maxed out on our credit. In some cases, with the collusion of the banks, [and encouragement of governments for the banks to lend more] we have overstated our incomes and understated our outgoings?

    Who do we blame, the banks, the Government, or ourselves?

    Do we blame the Government for the National Debt? After all governments have spent this money for one main reason. To get into Government and remain in Government and we the public have been happy to go along with it. That is until the true weapon of mass destruction as come into play, Compound Interest.

    Very few, if any, Democratically Governed Countries have run a balanced budget for years. The voters have been happy to accept the bribes? Tax breaks, subsidies or benefits offered by ALL political parties for your vote.

    The main question is, what can we/they do about it?

    Last comment about the banks, the main mistake was made back in the 80’s when the good old High Street banks and Merchant banks merged. [Mrs T and boy Cammeron?]

    The problem with the banks is that they stopped being banks and started being brokerage firms.Traditional banking couldn’t deliver the returns that could be made on Credit Default Swaps and sub-prime mortgages.The guzzillions paid to CEO’s for successful bets in the casino prompted them to place more complicated bets. JP Morgan just lost $2 billion on a poorly tested algorithm i.e. a kooky bet. But that’s OK they’ll cook up another one and maybe it’ll pay like the mud horse on a rainy day with the jockey who usually cheats at the track but this time will finish first. 🙂

    @Trevor It’s a fair cop, there is somethign irrational about CEO results being unquantifieable and trying to find S.M.A.R.T. objectives to it. Buyt you can only shift a culture so quickly, and a 50:50 split seems a good place to start!

    @Rob the trouble with those sort of metrics is they encourage management to sell tomorrow for jam today. In the end the pay negotiations tends to be on a yearly cycle and business strategy can take years, even decades in some cases. There’s an inherent asymmetry between pay, which is paid and is generally irrevocable due to the contractual nature, and business performance, which can look great for a while and then suck great gobs of cash out when the longer term consequences show.

    We’ve never really cracked this though bonuses seem to have been a giant step in the wrong direction. How do we know your cracking performance this year hasn’t shafted the firm in the next downturn?

    Some of Germany’s Mittelstand shows long-term even multigenerational investment can work wonders…

    @Lupulco Maybe the problem is the dark underbelly of democracy we want everything now and governments have simply become better and giving us what we want 🙂

    There has also been an appalling change in entitlement culture though. I’m sure we were a little more au fait with that if we wanted something it took work in previous generations. The introduction of the credit card and the interest-only mortgage were probably not greta finacial innovations in retrospect!

    I vaguely recall hearing about merchant banks in the 1970s I hadn’t realised that Mrs T combined them in a pre-echo of Clinton’s repeal of the Glass-Steagall in the US. The temptation to speculate rather than lend customers’ money seem irresistible!

    @g Agreed – we don’t seem to be good at making sure banks stay like banks, there seems to be an inherent force towards speculation. Havig said that I don’t mind if JPM lose $2billion it’s when other people have to cover the downside that it gets rough. At least JPM isn’t a bank in the terms of holding a checking account there.

    […] of things, be that in DW at The Oak Tree Farm, or the driven creative entrepreneur, or hell, even Diamond Geezer Bob ex of Barclays . That’s fine – but some of the rest of us wage slaves occasionally […]

     

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