{"id":413,"date":"2009-02-11T22:22:21","date_gmt":"2009-02-11T22:22:21","guid":{"rendered":"http:\/\/meeseeks:5080\/blog\/?p=413"},"modified":"2009-02-11T22:22:21","modified_gmt":"2009-02-11T22:22:21","slug":"bonus-culture-vultures","status":"publish","type":"post","link":"https:\/\/vukutu.com\/blog\/2009\/02\/bonus-culture-vultures\/","title":{"rendered":"Bonus culture-vultures"},"content":{"rendered":"<p>Since this post is certain to be controversial, let me state some things at the outset\u00a0for the avoidance of any doubt:<\/p>\n<ul>\n<li>Owners of companies have the legal and moral right to\u00a0establish any legal payment policies they so\u00a0wish.\u00a0 Thus, if the econopopulists now living at 10 and 11 Downing Street, London,\u00a0wish to abolish bonus payments to managers at the banks our government owns, then they have every right to do so.\u00a0\u00a0 As company owners, they do not need to give reasons for their actions.\u00a0\u00a0 As elected officials in a democracy, however, rational justification and evidence of due deliberation behooves them.<\/li>\n<li>People who fail should not be rewarded for that failure.\u00a0 Those who placed bad bets on house prices\u00a0or credit swaps should not receive financial rewards for their bad bets.<\/li>\n<\/ul>\n<p>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&#8217;ve either seen little of, or not seen reported at all.<\/p>\n<ul>\n<li>The first is that not all business units\u00a0of all banks and financial institutions failed, these last 6 or 18 months.\u00a0\u00a0 Some parts of even the bankrupt banks made profits, sometimes large profits.\u00a0 The managers who made those profits, particularly at a time of global economic doom, deserve whatever bonus payments they were promised.<\/li>\n<li>Second, many bonus payments are subject to legally-binding employment contracts.\u00a0 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.\u00a0 New owners or not, even owners living in Downing Street, have a legal and moral obligation to fulfil legally-binding contracts.<\/li>\n<li>Finally, in all the nonsense spoken about a &#8220;bonus culture&#8221; 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 &#8211; 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.<\/li>\n<\/ul>\n<p>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\u00a0managers of the companies our Government owns.\u00a0 The occupants of Downing Street, it seems to me, have their eyes firmly fixed on the next election, and the Government&#8217;s re-election thereat, and pretty-much nothing else.\u00a0\u00a0\u00a0 Neither rationality nor long-termism feature in such gazing, sadly.\u00a0 If it did, we would be reading in our media the details of the new,\u00a020-year, national infrastructure projects about to commence &#8211; thereby creating domestic UK employment, supporting local supplier firms, supporting demand, and providing a basis for future prosperity &#8211; \u00a0and not econopopulist nonsense about stopping bonuses to bankers.\u00a0 Can anyone even name, let alone describe,\u00a0a single infrastructure project that the UK plans to embark upon now?<br \/>\n<strong>POSTSCRIPT (2009-03-29)<\/strong>:\u00a0 The International Herald Tribune has carried an oped <a href=\"http:\/\/www.nytimes.com\/2009\/03\/25\/opinion\/25desantis.html?scp=2&amp;sq=AIG&amp;st=cse\" target=\"_blank\" rel=\"noopener noreferrer\">article<\/a> by Jake DeSantis, comprising a letter to resign his position as an executive vice president of the American International Group\u2019s financial products unit.\u00a0\u00a0His letter examplifies my first bullet point above:\u00a0 not all business units of failed financial institutions were or are failing, and it is unfair and irrational to punish those still successful.\u00a0 Punishment is irrational both tactically &#8211; since offended staff will soon leave &#8211; and strategically &#8211; since failed institutions still operating need to have some successful product lines to stay in business.<\/p>\n<blockquote><p>&#8220;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. &#8220;<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"<p>Since this post is certain to be controversial, let me state some things at the outset\u00a0for the avoidance of any doubt: Owners of companies have the legal and moral right to\u00a0establish any legal payment policies they so\u00a0wish.\u00a0 Thus, if the econopopulists now living at 10 and 11 Downing Street, London,\u00a0wish to abolish bonus payments to [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[19,25],"tags":[],"class_list":["post-413","post","type-post","status-publish","format-standard","hentry","category-corporate-culture","category-economics","p1","y2009","m02","d11","h22"],"_links":{"self":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts\/413","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=413"}],"version-history":[{"count":0,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts\/413\/revisions"}],"wp:attachment":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/media?parent=413"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/categories?post=413"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/tags?post=413"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}