Bankers' Bonus: Looking Back in Anger
Alistair Darling is looking angry. He has a right to be - his dream job turned out to be one of 24x7 crisis management almost the day he started. And, just when he seems to be getting a grip, there is an embarrassing possibility that some bankers, the same bankers who gambled with their depositors' money and rewarded themselves with hefty bonuses, may be at it again. This time, they may play with taxpayers' money, of which Mr Darling is in charge.
He can clearly see something coming. AIG, the ailing insurance company which was kept in business by a huge injection of taxpayer's money in the United States, decided to reward its executives and traders few months ago for risk taking and making short term profits, almost costing the job for Tim Geithner, the Treasury Secretary. There was a very public furore, but AIG gave those bonuses anyway. And, as if it did not matter at all, Citigroup just announced, despite being on life support, that they will be handing out $10 million on average to its top 25 executives, and more than $100 million to its top trader.
We are, indeed, going through the due motions of anger. The irreverent media stories about the obscene amount of money some of executives are getting paid. The opposition did their bit calling the banks to scrap the bonuses altogether and generating a consensus around the need to tougher regulations on the banks. The government unveiled some of the measures of its own , including the requirement that the bonuses can not be guaranteed for more than a year and the senior executives in the financial institutions need to spread their bonuses on a longer, three year, period.
But almost everyone knows that the governments can do very little. The Americans have set up an executive role overlooking just compensation in the organizations currently receiving public funds, but given Kenneth Feinberg, the incumbent, very little to play with. His job is to ensure that the executives are paid in line with the industry - an industry which has just got smaller through mergers and acquisitions and has the reputation of being an old boys' club anyway - so that the 'talent is retained'. Read differently, and this is what he is supposed to be doing - let the banks run their businesses as usual, but keep the Treasury Secretary out of the mess!
It indeed seems that the Governments everywhere know that they are at the mercy of the bankers - they knew it since the moment they had to pay for the bankers' follies and had to rescue banks which were 'too big to fail'. Since then, the banks have been well fed with cheap public money, given not just as direct handouts but also through increased money supply by the Bank of England [and the other Central Banks] at low interest rates. And, despite Mr. Darling's earlier displays of anger, banks merely focused on rebuilding their balance sheets with this public money and kept loans out of bounds, or very expensive, for businesses, which needed the money to create jobs. And, similarly, this time, it seems that while Mr. Darling [and Mr. Osborne, the Chancellor-Waiting-in-the-Shadow] has shown the due anger, banks will do exactly as they wish. Including the bonuses, indeed!
I say that because the governments on both sides of the Atlantic seem to have bought this nonsense about 'retaining talent'. No one seems to be saying 'what talent?' and that will anger anyone who have to pay taxes and worry about their jobs in a rather untalented way. This same talent brought us where we are, remember - no one seems to be shouting back; rather it seems that somehow the ministers have bought the unconvincing theory that the crisis was caused by a few bad apples, and the institutions themselves should remain out of blame and should be allowed to run their businesses as they always did.
The bonuses are a case in point, possibly very centrally so. The banks seem to believe that the bonuses are the only way to make people do a good job. Behavioural Economists dispute that assertion, and proved scientifically that while bonuses and incentives, the if-then rewards, work well for straightforward tasks [for making 50 phone calls a day, for example], they are actually counter-productive when the tasks involve a rudimentary cognitive skill [for example, make 50 phone calls and report accurately the problems the respondents were facing]. In summary, bonuses work well for dumbed down tasks. Now, if we turn the statement around, and say that a bonus-driven culture actually lead to dumbing down of work, that may not be scientifically substantiated, but the experience of this whole credit crunch affair will give that theory some credence.
The point I am making is this: the story leading to Credit Crunch almost reads like Our Man in Havana, the Graham Greene classic where the experts ['talents' in the current jargon] behaved in a particularly inexplicable way because they wanted to believe what they were hearing. And, even when the game was up, it was better to hide the mess and continue the business as usual rather than accept the truth, because that would have undermined an institution. It is not impossible, reading through the accounts of events leading to credit crunch, to visualize bankers and other non-banking intermediaries involved in the process developing a black art designed to fool people, intentionally dumbing down the due process and replacing it by a false sense of safety in complexity.
In summary, bonuses do not retain talent, it discourages it. Not only that. This madness about bonuses destroy organizations and its values. The sobering voices are already being heard. Henry Mintzberg, a leading management thinker of our time, is writing about the urgent need of organizations rediscovering themselves as communities, of employees, shareholders and customers, as they have originally been. Robert Reich, Clinton's Treasury Secretary and a Professor of Public Policy, is writing in his blog about the destructive effects bonuses had on the usual functioning of the banks and financial institutions.
As for the politicians caught in the middle, they can seek solace from the work of James March, Professor Emeritus at Stanford and a leading organizational theorist of our time. Professor March argued that our economic decisions are not just based on our self-interest [like what gets me most money] but also on our sense of identity [what would a man in my position should do]. Currently, most bankers are on the State payroll, like our soldiers in Iraq and Afghanistan. It is time they recognize that, and stop insulting everyone else by implying that people can not do a good job without a bonus being paid.