“Isn’t it funny
How they never make any money,
When everyone in the racket
Cleans up such a packet?”
This Basil Boothroyd poem was originally written about the movies, but it could just as well apply to banking. Bonuses are back in the limelight following the news that Enemalta managers received their bonus at a time when, in the opinion of many, the corporation was being driven into the ground. Now it is the turn of the ARMS managers, who too have received their bonuses despite the mountain of criticism directed at the company.
This leads many taxpayers to question the raison d’être for bonuses in government-owned entities just as many have already questioned the salaries of CEOs in the public sector. Is defending such largesse a political withdrawal into the citadel as the enemy advances or is there some other factor at work?
Well, let’s start with Mervyn King, Governor of the Bank of England. Last week this man, who will get broad powers to regulate the banking industry when the Financial Services Authority is abolished next year, posed an important question: “Why do banks in general want to pay bonuses?” He answered his own question by flatly stating it’s because they think they live in a world where they are too big to be allowed to fail and therefore they will always be bailed out at the expense of the taxpayer. HSBC is threatening that if they are not allowed to do what they like they will leave London and go back to Hong Kong. The Governor of the Bank of England on the contrary, is of the firm opinion that the concept of being too important to fail should have no place in a market economy.
Mr King also accused the banks of routinely exploiting their customers and of making money out of gullible or unsuspecting ones, particularly institutional customers, in ways that to the banks – but hardly to anybody else − are perfectly acceptable. Are there echoes locally supporting this charge?
The problem with bonuses
But why stop only with banks? Bonuses can be an intrinsic part of anybody’s remuneration package and a significant reduction can be a serious problem. It is a truism that the more someone earns the more they are likely to spend and borrow. It is also true that the last few years have been bumper ones for those involved in finance, especially those in investment banking and corporate finance. So this pre-spending may have surged in many households, which could exacerbate domestic problems, should that bonus money fail to materialise. After all, if a person is used to getting a lot of money at a point in time every year, s/he will certainly come to consider it as part of the salary s/he earns. As long as this remains a corporate problem, and not that of the taxpayer, then it is up to the people involved to solve their liquidity problems.
The question to ask is whether such “sweeteners” like bonuses really work. After all, employees can’t get past the day-to-day atmosphere. But we are living in a spend, spend culture even if the gathering storm clouds counsel prudence. For many people the conspicuous displays of wealth − new car, boat, home − is how they signify their achievement to their peers. It is questionable if this kind of one-up-man-ship could ever be described as healthy. But it is no use for those who can fly above the turbulence to try and counsel the rest to seek some kind of “health-check” life reassessment, which obviously does not apply to the high earners.
After all, basically a bonus is not much better than a bribe intended solely to fill any worker’s horizon with the lure of money to the exclusion of everything else. It is in this direction that any talk of values has to go if it is to become meaningful. Work environments where reward programmes are typically used are also very hierarchical and politically charged. More demoralising is the fact that, in general, the more you research, the more books you find telling you of the different ways in which to apply these allurements. You hardly ever come across any alternative, the implication being that this is the normal and progressive way forward.
We all know the arguments. People who justify high compensations say large payments are necessary to retain and attract top talent and to keep executives motivated. Another argument in favour of giant compensation is that managerial skills are highly valued in society and top business managers and leaders are worth at least as much as entertainment stars.
The most researched argument against extreme financial rewards is that, firstly, the money could better be used to improve salaries and shareholders’ returns. Secondly, it also focuses the attention of workers too much on the reward such as money or stocks. In the process the workers lose out on intrinsic rewards such as joy in accomplishment. Instead of being passionate about the work they are doing people become overly concerned with the size of their reward. One argument is that external rewards do not create a lasting commitment. Instead they create a temporary compliance such as working hard in the short run to earn a bonus. A frequent problem with merit pay systems is that a person who does not receive a merit increase then feels that s/he has been punished. So the tendency, at least in Malta, is to give a bonus to all.
An age-old answer
Lao-tzu, whose ancient works are the world’s most translated classic next to the Bible, stated: “It is better not to make merit a matter of reward lest people conspire and contend.”
Nearer our time, W. Edwards Deming has called the system by which merit is appraised and rewarded “the most powerful inhibitor to quality and productivity in the Western world”. He adds that it “nourishes short-term performance, annihilates long-term planning, builds fear, demolishes teamwork, nourishes rivalry and leaves people bitter”. He ought to know because he guided Japan to its international reputation.
Finally, in Paying for Productivity: A Look at the Evidence, Alan S Blinder, an economist at Princeton University, states: “Changing the way workers are treated may boost productivity more than changing the way they are paid.”