A fair day’s work for a fair day’s bonus

Bankers’ bonuses.  Are they fair?

That’s not necessarily about “personal finance”.  But it is a lot about psychology, in terms of “what is fair” – and also, what is a fair reward to pay somebody to invest your money for you?

When there are suggestions to cut or limit bankers’ bonuses, the argument is that “they bring in billions, if we don’t pay them well, they’ll go abroad and be lost to us”.

But think about  “they bring in billions”.  Banks make money on deals.  If they take one quarter of one per cent on each deal, and the deals are big enough, they’ll make millions every day.  By contrast, a financial manager in an NHS Trust might be a genius, she or he may save the trust 30% more than anybody else could do.  But their total budget is only a few million over the year, so even an exceptional person can only “make” a few thousand by saving a huge percentage.  But we pay bankers huge bonuses because, apparently, they play with large amounts of money, not because they are necessarily better than anybody else.  Should the Chancellor be paid millions because the company (UK plc) trades billions every day and he or she could claim to have “earned” a percentage?

By the same logic of “they make billions, therefore they should be rewarded in millions”, the person who cleans the toilets at a premier league football ground or a merchant bank should be paid a thousand times more than the person who cleans the toilets in an NHS hospital.   There is more money around, therefore what they do must be more valuable – or is that unfair?

If bonus was based on the “top” person actually producing more than somebody else doing the same job, they might justify being paid in proportion to the extra they bring in.  But that would be by contrast to the “next best”, not in comparison to what anybody could make given that they are going to get a percentage of several billion anyway.  

The problem with the comparison is, how much better are the top performers than the next person? 

I’ve said elsewhere that people often have trouble understanding what is luck and what is skill.  So perhaps you could actually let the bankers go, let somebody else pay them huge bonuses, employ somebody cheaper, and get very similar results for a lot less money.

And is “better performance” not simply “lucky performance” but “riskier performance”?   The New Economics Foundation said (in a TV programme, I can’t find the written reference) that several of the banks lost more in about six months than they made in the previous 20 years. 

Everybody thought the banks were doing well.  Gordon Brown was so impressed that he had Fred Goodwin knighted, and got him voted European Banker of the Year.   Nobody (regulators, media, economists, politicians etc.) said – “he’s a chancer, he’s been lucky so far, he’s taking too many risks, he’s greedy and pushing his luck”.  Everybody said Mr (sorry, Sir Fred) Goodwin was a genius.  And two years later Gordon Brown and everybody else was saying that he was a chancer, he’d taken too many risks, he was greedy etc. 

It is easy to be wise after the event.  If those same regulators, media, politicians, economists etc. want to claim that the current lot of bankers deserve bonuses, how long will it be before they are Knighted, made European Banker of the Year etc.  And how long will it be before they are condemned for taking too many risks, being chancers, fools, greedy etc.?

I don’t know.  I just think that with your own finances it would be wise to ask yourself:

  1. Is the banker, fund manager or other investment “expert” getting paid on the basis of the amount of money they handle, rather than their actual skill?
  2. Am I (or is anybody) prepared to stake my fortune on the fact that they show skill not luck in having a good track record?
  3. If their performance is actually better than the “next best” and it is definitely due to skill, am I (or is anybody) prepared to stake my fortune that the better performance isn’t due to taking more risks, that nobody has worked out are risks yet but that sooner or later will turn out to have been risks that didn’t pay off?

And when you’ve got answers, let me know – because I’m not convinced that anybody knows and in the absence of evidence, the scientist in me says that maybe the bonus system needs a bit more thought.

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