Since this post is certain to be controversial, let me state some things at the outset for the avoidance of any doubt:
- Owners of companies have the legal and moral right to establish any legal payment policies they so wish. Thus, if the econopopulists now living at 10 and 11 Downing Street, London, wish to abolish bonus payments to managers at the banks our government owns, then they have every right to do so. As company owners, they do not need to give reasons for their actions. As elected officials in a democracy, however, rational justification and evidence of due deliberation behooves them.
- People who fail should not be rewarded for that failure. Those who placed bad bets on house prices or credit swaps should not receive financial rewards for their bad bets.
But in all the Grand Populist Upswelling of Outrage (GPUO) fed or created by the media in Britain, in France and the USA (and maybe elsewhere) this last week over bonus payments to managers in the financial sector, there are some aspects which I’ve either seen little of, or not seen reported at all.
- The first is that not all business units of all banks and financial institutions failed, these last 6 or 18 months. Some parts of even the bankrupt banks made profits, sometimes large profits. The managers who made those profits, particularly at a time of global economic doom, deserve whatever bonus payments they were promised.
- Second, many bonus payments are subject to legally-binding employment contracts. Any half-decent financier would not have accepted a senior position without first having a written, legally-binding statement of what he or she was owed in payment under what circumstances. New owners or not, even owners living in Downing Street, have a legal and moral obligation to fulfil legally-binding contracts.
- Finally, in all the nonsense spoken about a “bonus culture” in banks, I have nowhere seen any discussion as to WHY bonus payments are common in the financial world. The first reason is that financial markets are capricious: despite all the boastful talk about skills and experience, and despite the multi-terabytes of computer memory, the massively-high bandwidths of connection, and the arrays of rocket scientists deployed, the taking of positions in markets is still a matter of taking views on the future, and betting these views against other views. The future is uncertain, so bets can lose, as well as win, and these two outcomes may happen regardless of the skills or expertise or resources applied to the taking of a view. People may be just lucky or unlucky – even clever, experienced, well-resourced, cautious, nice people. The second reason is that when bets win, they may win big. If a company makes hundreds of millions of dollars profit from a one or a handful of trades, it can seem most unfair to those deciding what trades to do that all of this capricious, windfall gain should accrue just to the shareholders. Those doing the trading therefore ask, quite reasonably in my opinion, for a share of this windfall gain. Most companies have then a choice: give a few percent of these capricious windfalls to the staff doing the work as bonus payments, or risk losing the staff to the competitor down the street who will. No rational, long-term manager would choose the latter option, and no rational, long-term shareholder would force him or her to.
Nothing in what I have written here should lead you to conclude that I consider the occupants of 10 and 11 Downing Street to be rational, long-term managers of the companies our Government owns. The occupants of Downing Street, it seems to me, have their eyes firmly fixed on the next election, and the Government’s re-election thereat, and pretty-much nothing else. Neither rationality nor long-termism feature in such gazing, sadly. If it did, we would be reading in our media the details of the new, 20-year, national infrastructure projects about to commence – thereby creating domestic UK employment, supporting local supplier firms, supporting demand, and providing a basis for future prosperity – and not econopopulist nonsense about stopping bonuses to bankers. Can anyone even name, let alone describe, a single infrastructure project that the UK plans to embark upon now?
POSTSCRIPT (2009-03-29): The International Herald Tribune has carried an oped article by Jake DeSantis, comprising a letter to resign his position as an executive vice president of the American International Group’s financial products unit. His letter examplifies my first bullet point above: not all business units of failed financial institutions were or are failing, and it is unfair and irrational to punish those still successful. Punishment is irrational both tactically – since offended staff will soon leave – and strategically – since failed institutions still operating need to have some successful product lines to stay in business.
“As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house. “