{"id":1052,"date":"2009-09-09T18:11:06","date_gmt":"2009-09-09T18:11:06","guid":{"rendered":"http:\/\/meeseeks:5080\/blog\/?p=1052"},"modified":"2024-02-24T14:29:18","modified_gmt":"2024-02-24T14:29:18","slug":"bonuses-yet-again","status":"publish","type":"post","link":"https:\/\/vukutu.com\/blog\/2009\/09\/bonuses-yet-again\/","title":{"rendered":"Bonuses yet again"},"content":{"rendered":"<blockquote><\/blockquote>\n<p>Alex Goodall, over at <em>A Swift Blow to the Head<\/em>, has written\u00a0<a href=\"http:\/\/blog.dralexgoodall.com\/2009\/09\/banking-is-too-important-to-be-left-to.html\" target=\"_blank\" rel=\"noopener\">another angry post about the bonuses paid to financial sector staff<\/a>. I&#8217;ve been in several minds about responding, since my views seem to be decidedly minority ones in our present environment, and because there seems to be so much anger\u00a0abroad\u00a0on this topic.\u00a0 But\u00a0so much that is written and said, including by intelligent, reasonable people such as Alex, mis-understands the topic, that I feel a response is again needed.\u00a0 It behooves none of us to make policy on the basis of anger and ignorance.<br \/>\n<!--more--><\/p>\n<blockquote><\/blockquote>\n<p>Let me start by repeating firmly <a href=\"http:\/\/meeseeks:5080\/blog\/2009\/02\/bonus-culture-vultures\/\" target=\"_blank\" rel=\"noopener\">what I said before<\/a>\u00a0(here abbreviated), as preface:<\/p>\n<ul>\n<li>Owners of companies (including the present British Government) have the legal and moral right to\u00a0establish any legal payment policies they so\u00a0wish.\u00a0<\/li>\n<li>People who fail should not be rewarded for that failure.<\/li>\n<\/ul>\n<p>Then let me repeat this para:<\/p>\n<blockquote><p>Finally, in all the nonsense spoken about a \u201cbonus culture\u201d in banks, I have nowhere seen any discussion as to WHY bonus payments are common in the financial world.\u00a0\u00a0 The first reason is that financial markets are capricious:\u00a0 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.\u00a0\u00a0 The future is uncertain, so bets can lose, as well as win,\u00a0 and these two outcomes may happen regardless of the skills or expertise or resources applied to the taking of a view.\u00a0 People may be just lucky or unlucky \u2013 even clever, experienced, well-resourced, cautious,\u00a0nice people.\u00a0\u00a0\u00a0 The second reason is that when bets win, they may win big.\u00a0\u00a0\u00a0 If\u00a0 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\u00a0shareholders.\u00a0 Those doing the trading therefore ask, quite reasonably in my opinion, for a share of this windfall gain.\u00a0\u00a0\u00a0Most companies have then a choice:\u00a0 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.\u00a0\u00a0 No rational, long-term manager would choose the latter option, and no rational, long-term\u00a0shareholder would force him or her to.<\/p><\/blockquote>\n<p>There is another aspect to the business of the financial sector that I overlooked in this description.\u00a0 For most of us working in companies, our actions have impacts on the revenues, costs and profits of the company only indirectly.\u00a0 Typically, the larger the organization the more indirect the effects.\u00a0 A product manager for\u00a0one of the thousands of consumer products at, say, Proctor and Gamble, for instance may have great ideas for innovative product development, ideas which, when implemented, lead to massive increases in corporate revenues.\u00a0 But she would not be able to develop these ideas, create the necessary support infrastructures (which may\u00a0include regulaory approvals, product redesigns,\u00a0new manufacturing facilities, new supply or distribution networks, or new marketing campaigns)\u00a0and then execute them, without help and support from a very large number of people; perhaps as many as tens of thousands of people would be involved for the most complex of products, from research scientists through to traveling salespeople in equatorial Africa.\u00a0\u00a0 Success in such environments requires real &#8211; and all too rare &#8211; skills at group-working, information sharing, socialization, co-ordination, complex project planning, and managing of others (in all directions: below, above and laterally), inside one&#8217;s own company,in partner companies, and in governments and regulatory agencies.<\/p>\n<blockquote><\/blockquote>\n<p>These abilities are required in addition to whatever linguistic and\/or mathematical intelligence required (which can be considerable for any high-tech product and even for ordinary consumer durables)\u00a0and so-called emotional intelligence.\u00a0\u00a0 This is a <em>getting-things-done intelligence<\/em>, a skill-set that otherwise very intelligent and successful people may lack, for example, academics, writers,\u00a0lawyers, doctors.<\/p>\n<blockquote><\/blockquote>\n<p>Strangely enough, few bankers, in my experience, need these getting-things-done abilities\u00a0either, and few have them.\u00a0 The large sums in finance, which generate the large bonuses, usually accrue (as I said above) to successful bets on the future.\u00a0 To make such bets you need: (a) to take a view on the future (a view which may arise from sophisticated, complex and expensive computer modeling) and (b) money to bet with.\u00a0 You don&#8217;t normally need\u00a0a large team behind you, although computer modeling may require rare and specialised &#8211; and hence, expensive &#8211; skills. You don&#8217;t need much equipment, just a laptop and access to processing power (now rentable by the minute); you certainly don&#8217;t need a factory, or a global distribution network, or a boffin-filled R&amp;D lab, as the product managers for P&amp;G do.\u00a0 Apart from the money used to bet with, you don&#8217;t need much money either.\u00a0\u00a0 You may need, as <a href=\"http:\/\/www.sps.ed.ac.uk\/staff\/sociology\/mackenzie_donald\" target=\"_blank\" rel=\"noopener\">sociologist Donald MacKenzie <\/a>has shown in his detailed fieldwork studies of financial institutions, a good network of contacts,\u00a0both in your own organization and outside it, of people whom you trust you and who trust you; you need this network in order to be able to accurately predict financial market movements, and to predict how market participants would be likely to react to new information, in other words, to help you to take a view on the future.<\/p>\n<blockquote><\/blockquote>\n<p>So, suppose you work for a large financial institution in the City of London, betting on (say) US Dollar-to-Japanese Yen exchange rates.\u00a0 You come into work, you read the newsfeeds, you look at the numbers, you talk with your network, you (or your team) do your computer simulations, you take a view of the future, and you place your bet.\u00a0\u00a0(You may do this with any frequency, from every few weeks to every few minutes, depending on the market you are in and the strategies you running.)\u00a0 \u00a0The money you use to bet with belongs to your employer.\u00a0 Perhaps you bet the value of the USD will rise in comparison to the Yen, as a result of the recent Japanese election.\u00a0\u00a0 Or perhaps you bet that most other exchange traders will bet that it will rise for this reason, and so you would profit from betting against them.\u00a0 For whatever reason &#8211; good judgment, intuition, experience, clever algorithms, computer processing power, speed of reaction, personal network connectedness, luck, clever accounting, inside information, mojo, guidance from the beyond\u00a0&#8211; your bets are successful, and thus you (and perhaps your small team) generate large revenues for your employer.<\/p>\n<blockquote><\/blockquote>\n<p>Unlike our friend at P&amp;G, no one can say these revenues depended on the supportive and co-ordinated activities of hundreds or thousands of people working over months or years.\u00a0 No one can say that your employer would have got the revenues\u00a0anyway, even without you.\u00a0 And given the few required inputs listed in the previous paragraph, no one can stop you walking out of your office one afternoon and offering your successful judgment (your view-taking ability) to some other employer with money to bet.\u00a0 As the saying goes, the bank&#8217;s key assets walk out\u00a0the front door each evening.<\/p>\n<blockquote><\/blockquote>\n<p>In other words, large bonuses exist in the financial world because large revenue streams exist which are directly traceable to the actions of a small number of people, and because not paying\u00a0good bonuses to these people risks the employer losing the revenue streams.\u00a0\u00a0\u00a0None of this is evidence of malice, or evil, or some\u00a0malcontent recalcitrance on the part\u00a0of bankers, failing to reform despite the bailout.\u00a0 It is the very nature of business under capitalism.\u00a0 Employees are acting rationally and ethically in asking for such bonuses, and employers in giving them.\u00a0 Large bonuses would exist in other industries if the conditions were right; indeed, they do, for senior managers in IPOs and acquisitions, or for Hollywood stars, able to guarantee large audiences for the opening weekends of films.\u00a0 In both these cases, as with\u00a0finance,\u00a0large money streams can be traced directly to the actions of a small number of people.\u00a0\u00a0\u00a0If you were to make it illegal for banks to pay bonuses, then for consistency&#8217;s sake, you&#8217;d have to also tell JK Rowling to give up her\u00a0millions.\u00a0 Arguing that bonuses should not exist will be about as successful as arguing that water should not run downhill, and is, in my opinion,\u00a0about as rational.<\/p>\n<blockquote><\/blockquote>\n<p><em>Reference:<\/em><br \/>\nIain Hardie and Donald MacKenzie [2007]: Assembling an economic actor: the <em>agencement<\/em> of a Hedge Fund. <em>The Sociological Review<\/em>, 55 (1): 57-80.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Alex Goodall, over at A Swift Blow to the Head, has written\u00a0another angry post about the bonuses paid to financial sector staff. I&#8217;ve been in several minds about responding, since my views seem to be decidedly minority ones in our present environment, and because there seems to be so much anger\u00a0abroad\u00a0on this topic.\u00a0 But\u00a0so much [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3,19,23,28,47,62,66],"tags":[],"class_list":["post-1052","post","type-post","status-publish","format-standard","hentry","category-africa","category-corporate-culture","category-decision-theory","category-forecasting","category-market-planning","category-planning","category-project-management","p1","y2009","m09","d09","h18"],"_links":{"self":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts\/1052","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/comments?post=1052"}],"version-history":[{"count":5,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts\/1052\/revisions"}],"predecessor-version":[{"id":12207,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts\/1052\/revisions\/12207"}],"wp:attachment":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/media?parent=1052"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/categories?post=1052"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/tags?post=1052"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}