So how did this early retirement lark work out in the end

It’s coming up to about nine months since I retired about eight years early from work – that’s eight years than the normal retirement age for The Firm. Truth be told, I retired for negative reasons rather than positive, but I’m not going to go on about those particularly. Because people just don’t bang the drum for the positive things that happen when you are retired. Like everybody else, I assumed it was all about the money. That’s everybody’s greatest fear. What you don’t hear about is the multiplicity of little things that all add up to a far better experience of life.

I caution that to make these work for you, you must eliminate debt, and that means all debt. Yes, your mortgage too[ref]an exception can be made for this if you are saving tax-free in a pension with the aim of using the 25% pension commencement lump sum to pay off the mortgage in full on retirement. In my view this isn’t the clear-cut win for early retirees who will defer their pension for 5 years or more, but IFAs seem to recommend it for many people.[/ref], and that means doing without a lot of consumables while working, and probably having a reasonable amount of luck at times. You don’t borrow money from a bank, you borrow it from your future self, and if your future self will have less income than your current self, it makes no sense to be in debt.

So what does life retired look like? It’s all about owning your own time. It was given you as your birthright but was taken away from you early in life. Somebody said to me that time is the ultimate consumer good. He has a point, though I had to live it to know it, and also to have enough time to crawl from the wreckage of my curtailed career.

Owning your own time is delightful – you have the choice of what to do and when to do it. Before retiring it pays to prepare your human setting too, who will you know and spend time with, and that’s worth giving some thought to that before you retire. It’s particularly important for early retirees because a lot of their existing friends and acquaintances will still be working, some people I knew who retired even earlier than I did felt lonely, particularly those that retired in their mid forties, and I learned from their experiences – these were typically single guys, it took me longer than for them. Give thought to how you will maintain and develop your human connections, because as you get older it is Who is in your life that matters, not so much What is in your life.

The upside – my skin looks better and younger, the bags under the eyes fade, I slowly lose some of the weight that accumulated over my years behind a desk and in the lab. I walk more and bike more. I hear the birdsong, if there’s a good blackbird I will sit and listen to him for a while. I sit down for meals at a table rather than scoffing overpriced sarnies at my desk, I have more time to spend with the people I care about, I can read books, I can build things, learn how do use woodworking tools better, enjoy the company of people more, listen to people better, learn more, play more.

I watch less TV than I did while working. I tolerate no ads – I use ad-block plus on the Internet and less TV cans that at source, on the occasions I do watch TV I use a PVR and fast forward over the ads. If I have a requirement that may need buying something I use google – I buy things on my own terms, not because somebody is creating a desire in my head for shit I don’t need. I don’t buy anything on impulse, I wait at least a couple of days to see if the want is really a want. But if it is, and it fits my values, I buy it. If an offer has gone and I need to pay 10% more, so be it, that’s the price of living on my own terms and agenda. I don’t piss about with low-rent stuff like quidco and cashback, I have three credit cards but if I use them I pay them off in full. I’ll never get another credit card because I have no wage income, just investment income so I presumably look like a deadbeat living under railway arches on a credit check. Do I care? No – if the existing cards kick me off then I’ll pay by debit card or by cash, because I Don’t. Borrow. Money. ever since discharging my mortgage.

I can’t recommend early retirement enough. But you do need to be prepared to make the ‘sacrifice’ of living on less. I surrendered eight years of income when I retired, if you add all that up it’s a lot of money. I was happy to pay the opportunity cost, because that’s also eight years of life I’ll never live again. For me that was the right call – indeed perhaps I should have looked ahead and done it earlier.

Early retirement means I have less Stuff in my life. But I have more joy. Early retirees needs to speak up for it, because where are the ads on TV for Earn Less and Buy Less but Live More? We in Britain are so much richer now than we were thirty years ago, when I started my working life, I heard an estimation on the radio we have about twice as much disposable income as people had then. Stuff rather than Time seems to have got the thick end of our extra income. I am in my early fifties – the London I grew up in used coal fires and many houses had no central heating, some still had outside toilets. Cold and damp and the associated aches and pains were prevalent in the adults, so when I hear the Joseph Roundtree Foundation talk in terms of needing Sky TV to take an active part in society I wonder if perspective hasn’t been lost. We really have so much now. Ivan Illich called it out well in Tools for Conviviality in 1972. We are so much richer now than we were then, but are we any wealthier, I wonder? You are wealthy when more money wouldn’t massively change where you live, and how you live…

For each of us the sands are running through the hourglass, one day at a time. Making the call on as to where you place the balance between More Stuff and More Life is one of those things that is Important but not Urgent, so it always goes to the back of the to-do list. It’s worth dusting that question off and taking the time out to work through the options. You can measure more Stuff, and you can measure More Money. You can’t measure More Life. And I’ll stick my neck out and say Tom Peters was absolutely full of shit when he said you get what you measure. It works a peach in business, maybe. But in Life, it causes you to prioritise the measurable, the ‘how big is my…’ insert KPI here. And yet, when people look back on their life at the end of it, it is often the immeasurables – seeing their children grow up, and who they spent time with – or didn’t’ spend enough time with. The days are long, but the years are short. Though it’s schmaltzy in a uniquely American way, Gretchen Rubin nailed it. Don’t forget to live in the moment, because those moments are precious and they are running out.

My eventual projected annual expenditure is about a fifth of what I was being paid at The Firm, and I have a better quality of life – because I determine what a day looks like. There are other things that are odd about being retired. I have deliberately and intentionally avoided the whole work issue. I toyed with claiming JSA but figured a) I’m not looking for work and b) the stress of wanting to lamp some pipsqueak in the Jobcentre wasn’t worth the £1500 that six month’s contributions based JSA is worth, particularly as I’d have to pay tax on it.

Managing personal finances after work is enormously different to when you are working. While working, my income was single valued and knowable. Now, it comes from multiple volatile and erratic streams. I have the ISA income, which I reinvest. A similar sized lump of non-ISA shareholdings, that I have to capital gains spring and shift to the ISA over the years. And then cash holdings. These are horrendously different from what they were when I was working. What you must not do, when you retire early is to look at these accounts, and go Wow, I am rich. It is the lottery winner’s curse – most people have been used to a regular income and virtually zero savings all their working lives. So suddenly when it’s all savings and no income they see Big Numbers in their bank accounts and think they are rich, and lose their heads.

They’re not rich. Capital is worth about 5% as income, so divide all those numbers mentally by 20, high-roller. So unless you have half a million in the bank, then you aren’t even going to be living on the UK average wage. I don’t have anywhere near that much in the bank, BTW, though I don’t have the parasitic housing costs most people have because I paid down my mortgage. And if you do have half a million pounds in the bank then you need to remember what happened to the good people of Cyprus recently, and make sure you don’t have it all in one place, because you will probably be called upon to help with the national debt at some stage.

When I left work, I started to see those big numbers, and it is hard to explain just how scary and unreal they seem. I froze, and tried to keep the headline networth figure from falling. I’ve never worried about networth before, indeed there is no figure for house networth in my accounts, whereas this evanescent figure seems to be all that my fellow-Brits seem to concern themselves with. Maintaining networth was not the design aim of the plan, but there is a visceral aspect to money. All of a sudden I see strange numbers, and the power is cut, there is not steady income. The analytical solution I had designed over the preceding years was correct, but I found it hard to live it at first, to surrender a little bit of networth each month, in a long glide path for about three years. Even at the planned rate of descent, I would have half the nominal value of the capital, though more would be in ISAs by then.

I consider myself a reasonably hardened investor. I flew into the 2009 storm, in both AVCs and ISA savings. I’ve seen individual stocks plunge by over half, and recover, first on a total return basis and then on a nominal basis. But I quailed when faced with living a plan I had designed and was going slightly better than planned, because it was so alien to my experience of handling money. Don’t underestimate that effect of losing an income, even if you amass large amounts of capital compared to your mortgage-paying wage-slave life. Perhaps I was overly irrational etc, but I believe that it is not possible to be successful and totally rational about money. It is crystallised human work, a claim on other people’s effort. I must be involved to animate the plan and couple intention with action. And it still took me months to overcome the resistance to doing what I had planned myself 😉

I recently discovered I have been working without knowing about it, fortunately in time to stop getting paid before the tax year ends 😉 In times gone by I was interested in sound recording, and made a few field recordings which I added to a microstock agency. I’m not talented enough as a photographer or a recordist to make headway in that sort of this as Ermine photography. But microstock works for me – I don’t have to deal with people or rights and all that, the agency sorts that for me. The downside, of course, is you expect to make the price of a couple of pints of beer on it, or maybe a decent meal out.

I haven’t bothered to track any of this for a while. It appears that these firms are making me significant money, and I also have a few website estates that bring in a fair amount of Adsense revenue (this isn’t one of them 😉 ). I have told all these guys to hold payment till mid April to forestall creeping over the personal allowance this year. It is, however, very sobering to find that this stuff, which I had forgotten about, is actually making me about the same amount of income as my ISA, which has received by far the greatest part of my attention. My field recording equipment lies on a shelf covered in dust now, because the river of creativity dried for a few years as I focused all energy on getting out of The Firm.

I had a strange experience a few  weeks ago, I travelled to London to listen to a concert by a singer whose records once kept the thin thread of the young ermine’s fire alive through a long night until the break of dawn during a difficult time at university. The past is a foreign country – thirty years ago there were no mobile phones, indeed without phones at all in the typical sort of crummy bedsits I rented them. If you passed midnight then you had to reach the break of day before assistance could be raised if you couldn’t haul your ass up the stairs and into the cold city night with no Tube service.

As I heard the song once again it resonated across the years and changed something. In reminding me of that turning point it invoked another and the dead hand that jammed the creative centre unblocked, and the spark flickered into life once again.

For several years I fell back and fell back, trying to save enough money to derisk the financial issues. I had saved enough money – I still have no pension income, and my run rate is a little bit lower than originally designed. But I also focused a lot of effort on trying to understand the financial conundrum of how to make money out of money. That was reasonable, because towards the end of working for the Firm, the flame of creativity flickered and failed. The accumulated financial capital was all the resources I could count on, because my human capital had fallen to zero – without the creative spark I could not drive things forward. I would look at code and it would all swim before my eyes and have no relation to other bits, my photographs were technically okay but pedestrian. I would hear things that once meant something to me and they did not lift my spirits. It was too easy for projects to end up as half a page of scribbled lines or half a circuit board and nothing else. I’m not going to sell my time to another employer – I am too old to be employed at a level that would meet what I would charge for my time. That means I would have to create value, and doing that without a creative spark just doesn’t happen.

However, when I discover that two lots of legacy activities are now passively earning me more return than my multi-year and reasonably well performing ISA is then it begs the question on whether I have the focus right for the me now as opposed to the me 12 months ago. Money is not the only way to buy passive income, and the tragedy is you can only buy about £500 worth p.a. of tax-free income in an ISA every year. And obviously it costs you 10 grand a go, though this is ideally not a sunk cost. I can probably beat that income without breaking a sweat with a bit of improvement ot the website and some recordings. I could blow the dust of my Sound Devices 702 field recorder and Sennheiser microphones and get out in the field are record interesting sounds. I think people use the sounds in video games, I haven’t played video games since the 1980s but I got a book out of the library to see how people master audio for games when I discovered this.

I don’t miss work. One little bit. I don’t miss the Calvinist sense of purpose or all that sort of garbage. I have no time for the ‘find the work you love’ brigade. I’m with the Mexican fisherman. That isn’t to say that I spend my days lying in bed – the world has plenty of wrinkles enough to keep an inquisitive Ermine’s mind entertained.

There is the lovely story of the flight of the sparrow through the mead hall by the Venerable Bede’s Ecclesiastical History of the English People

the present life of man upon earth, O King, seems to me in comparison with that time which is unknown to us like the swift flight of a sparrow through mead-hall where you sit at supper in winter, with your Ealdormen and thanes, while the fire blazes in the midst and the hall is warmed, but the wintry storms of rain or snow are raging abroad.

The sparrow, flying in at one door and immediately out at another, whilst he is within, is safe from the wintry tempest, but after a short space of fair weather, he immediately vanishes out of your sight, passing from winter to winter again. So this life of man appears for a little while, but of what is to follow or what went before we know nothing at all. If, therefore, this new doctrine tells us something more certain, it seems justly to be followed in our kingdom.

Work is somehow like an inverse of that – the young sparrow starts in childhood from the warmth of the mead hall, then enters the life of work, where he battles the wintry storms of other people having control of his time and purpose, until perhaps later on he re-enters the warmth of the mead hall, in control of his own resources and destiny, perhaps for the first time.

I didn’t particularly dislike work for the vast majority of my working life. But work isn’t what life is about. It’s a means to an end. It’s far too easy to lose sight of that, on the long journey through the wintry tunnel of work, and it’s too easy to build must-haves into life to compensate for the long winter. But the tragedy is that these must-haves – the extra house square-footage, the chichi holidays and city breaks, they all add up. And so you can find that your winter holds no spring, and the sparrow must fly onwards till he falls out of the sky.

Work. It’s overrated compared to Life IMO… Each to their own, but I hear a lot of grumbling about work. And for sure, I’ve done my fair share of grumbling too, but at least in the end I took the fight to the enemy. It’s not all all about the money. It’s also about the time. You can save money, sort of. You can spend less of it. But you can’t save time – try spending less than seven days over the next week. That’s why you need to think about living in the moment. The Moving Finger writes; and, having writ, moves on…



Help to Buy = Moral Hazard. What on earth could go wrong?

On Monevator, there’s a good and spirited discussion has taken Help To Buy apart in detail. So this is just a rant, since despite imploring Cameron not to fight the tape last year, he’s actually taken a bastardised concept that at least had some merit – favouring the first time buyer, and compounding the mess.

The housing market in the UK is deeply and fundamentally f*cked up. There really is no other way to describe it. It is a world of hurt for an awful lot of people, and there is no excuse for the Government criminally acting on behalf of a small proportion of the population that seems to hold sway over policy.

Let’s look at some of the facts. Only half of owner-occupied houses in the UK are owned with a mortgage [ref]before anybody boils my head for the fact that 31% is not half, note that all owner occupiers are 66%, and the non-mortgaged guys are 31%, a shade under half[/ref]. Assuming that tenure applies to adult occupiers, there are about a third of occupiers who rent in some way and another third who own outright. These latter two groups are taking the shaft from a high house price policy.

The renters are taking the shaft because a significant proportion wants to buy, and the ones who own outright are taking some of the shaft indirectly because they are old gits whose savings will be destroyed by the inflation being unleashed by the money printing used to drive interest rates down, so that damned fools can be persuaded to overpay for houses.

And now the Government now wants  to assist those fools in paying even more for houses. And I am hopping mad. Because I don’t want to go through the next depression when the music stops and our money is worth jack shit. At the very least it is rude or the Government to push the stick forward into the next housing-related financial crisis before we’ve done with the current one!

I hold too much cash as it is. I am starting to consider taking some of the Governments blasted money and mortgaging my own house. But then what do I do with the cash? What on earth holds value in this stupid world of make-believe? Where do you put it? In Euros thieving barstewards want to have at 10% of it, or more if they please, I don’t believe the US debt will do foreigners any favours when the chips are down. It is like we are living in end times, everything shimmers and nothing represents real value or a true claim on future human work.

60% of people living in houses don’t benefit from high house prices. We don’t need a crash, but we don’t need tosspots trying to inflate prices, leave ’em be and let the invisible hand do its stuff. Oh and if you are thinking goody goody the government has made it easier for me to own my own home, then perhaps you should read this cautionary tale. I walked away from half the price of my first house and all of my 20% deposit, more in real terms, ten years after the Lawson boom of 1989. House prices do not always go up. And the longer they have been inflating, the bigger the bust.

The tale won’t do any good. I didn’t believe people in 1989 when I stupidly overpaid for a house. You won’t believe me. But what really, really, pisses me off is having to pay for your stupidity in the years to come when we have the strings and violins playing for jerks like this, who will then claim benefits for their unsustainable lifestyle. I had to pay for my mistake myself, one sodding pound at a time.

Oh and one other thing. Pay your damn capital down, either via a bog-standard repayment mortgage, or via parallel investment systems like a S&S ISA or wizard wheezes like Monevator’s better way to buy a house, though in the latter case have the damn self-discipline to make it work – no splurging on having too many kids or foreign holidays.

Look ahead of you. The power balance in Britain is shifting away from labour to capital. Do you really want to commit so much of your future earnings to buying an illiquid asset at a spectacularly high price? There are better things to do with the fruits of your labour than to sink it into ten thousand bricks and a postage-stamp plot. It’s not impossible to imagine a Spain like property scenario here. As the Germans say, the good Lord sees to it that the trees do not grow into the sky. If house prices get inflated then the value of the money will be destroyed. The rest of us, that’s the 66% who either want to hold on to wealth to live on in our old age or build it to be able to pay our rent passively, will have to invest – in stuff, anything that pays some return and is reasonably nailed down in reality for when the results of this arrant stupidity come home to roost. There aren’t enough real assets in the world to compensate for the make-believe of house price inflation.

The tragedy is that if you need Help to Buy, you can’t afford a house. Look at the graphic in Monevator’s post. You are trying to buy a £200k house, so you save 10K and the Government loans you 40k interest free. You go whoopee-do because you can now pay 40k more than you could before. So you go to the estate agent and offer 20% over  the odds, because you now can, and because your brains fall out when you are British and buying your first house. Just like mine did. You have just increased your capacity to overpay by 400%, so you will lever up by 20%.

As it says on the tin

The Government will lend you up to up to 20% of the value of your property through an equity loan, which can be repaid at any time or on the sale of your property.

Where’s the small print, then? You are going to buy this when money is tight, kids may be on the way, oh and we seem to be stuck in a never-ending depression where everybody ends up working part-time. In three years the scheme will end, and all of a sudden people won’t be able to overpay for your house when you have another babe on the way and need to step up. What’s going to happen to house prices then, eh? If you’re lucky interest rates will still be on the floor, though if there really is a recovery then they won’t be, which will reduce what people can pay for a house. You’re going to have a barrel of laughs if you have to move for work, and discover that people don’t want to pay you as much as you paid. All of a sudden you find you’ve geared up your losses, from 10k to 40k. Of course, the Germans might be wrong and house prices will go up, and up, and up like Jack in the Beanstalk. You have to ask yousrelf, though, where will your buyer get the money from? If they don’t inherit it, they have to pay their mortgage from net income, and the IFS indicates taxes will have to rise in the UK to reduce the deficit (that’s right, the deficit. The debt is a lost cause). If taxes rise they will find that harder to do.

If prices don’t rise, you will find out what I did – it’s damn difficult to repay a mortgage if the asset you bought with that loan sells for less than the loan, because unlike in America, mortgages come with recourse in the UK – they chase you for the money you owe. How do you repay that? You take your salary, and throw some of it into a black hole for which you get nothing in return. I’ve been there, done that, and believe me, it was no fun.

Help to Buy would have totally shafted me. Instead of paying down about 50% of the addle-headed price I overpaid for my first house, I’d have ended up paying down about 65% of it. Wow. What a fantastic deal!

And you know what the worst thing about this is? If you are unlucky enough to be in your early thirties and looking to buy a house, you’re going to have no choice but take the Government up on this deal. Because every other stupid twit is going to, so even if you know this is a mad thing, you’ll either have to pay over the odds using the Government’s money or stick your life on hold for a few years as far as buying a house is concerned. That’s easy if you’re young, free and single, but not so good if you have a pressing need for more space now.

So I have one question to ask Dave.

Why are 60% of adults paying taxes to shaft themselves in favour of the 30%, who will find out they also took the shaft when the scheme ends?

What the hell is up with that? If the Government wants to spend money on housing, build council houses. And employ a Keeper Of the Commons, so that when a politician like Thatcher comes along and wants to sell commonly paid for assets to buy herself some votes, the Keeper of the Commons pulls out a silver revolver and holds it to their head with a wizened skull in their left hand as a memento mori. And asks them if they really, really, want to do that. If the answer is yes, then pull the trigger and invoke an immediate General Election. Reloading the revolver before the next cynical vote-buyer has a chance to get elected. There needs to be real and serious penalites for politicians buying votes now with the common good of the future. Thatcher did the British housing market a world of hurt by flogging off the housing assets that had been built with the common effort of the post-war generation so people would vote for her again.

It really is high time the British government butted out of the housing market. Every time they touch it, something about it gets worse for more people than benefit. Is that really the job of government in a democracy, to favour a minority at the expense of a majority? There are better ways to improve housing in Britain. There’s no God-given reason why so many people should aspire to owner occupation. We do in Britain because decades of Government policy, starting with Thatcher, have either destroyed perfectly decent alternatives (council housing) or made them so horrible, like renting from amateur BTL landlords who bodge repairs – my London landlord fitted the electric shower to the lighting circuit, for chrissake. Renting in general on shorthold tenacies with no long-term security of tenure is no fun. At least if you rent from the bank, as any of you with interest-only mortgage are doing ,then at least you get a few years security of tenure 😉 If the Government can’t make it better, then at least they ought to observe the Hippocratic oath, and do no harm.

Too many people borrow too much money in this country to overpay for crap to live above their means. Higher house prices are part of the problem, not part of the solution.

Cait Reilly was out of order about Poundland, but not half as out of order as the Government

Cait Reilly shot to fame as the woman who was too special to work for her Jobseeker’s allowance because she was too busy with more important things to do with her time. In particular she wanted to do her work experience in a museum rather than Poundland.

Now my experience of work has usually be that he who pays the piper calls the frickin’ tune, so evenually when I came to be sick of the tune I had to tell the piper to get on his bike. Then you don’t get the pay, natch. So as far as I am concerned Reilly’s case doesn’t wash. In the end if the DWP is paying you, Cait, and they say you go  to Poundland, well, you go to Poundland. Or you stop claiming JSA. The choice is yours.

Cait Reilly in Poundland
Cait Reilly in Poundland

However, Reilly pressed her case through the courts, and the law of the land as it stood at the time found in her favour. Which in the end is as it should be. I’m entitled to shoot my mouth off here but the whole point of living in a complex human society is that you need organised ways of determining rules and we have one. And it found that Cait Reilly was right and the DWP and I were wrong.

We have Parliament, which makes the laws, and the judiciary, that interprets the laws, and that’s because tough experience in human societies shows that when the guys who make the laws do the intepreting and applying it all tends to go downhill and ends up with some Big Cheese saying “You lot damn well do what I say and I call the shots round here”. The more swivel-eyed nut-jobs think we’ve already got that but I’m not one of them. Although Britain has its problems at the moment they pale into insignificance compared to the issues of some human societies at the moment that have ended up with the “I call the shots round here”, and if the price of that is that the Cait Reillys of this world get their way and a free ride at the taxpayer’s expense then that’s not too bad a price to pay for holding the thin line against mob rule 😉

Parliament is perfectly entitled to say, having seen this debacle, that no, what they meant to happen agrees a lot more with my view on things than Cait Reilly’s. And obviously I think that’s a Very Good Thing. But what I am most certainly not happy about one little bit is the attempt by the DWP to create a retrospective law to avoid paying out the JSA that was denied to jobseekers up to now because they were wrong.

The Department for Work and Pensions has introduced emergency legislation to reverse the outcome of a court of appeal decision and “protect the national economy” from a £130m payout to jobseekers deemed to have been unlawfully punished.

Hello Iain Duncan Smith and the government generally. What exactly is it about unlawful that you don’t get? We’re going to a bad place when the Government shows a disrespect for the laws they make, and retrospective legislation is always a disrespect for the rule of law. Law only has meaning when it is knowable, and if people can come back in time and change laws retrospectively, then anything can be made unlawful.

So back off, IDS and call off your dogs. By all means change the legislation from this point on, so that precious princesses like Cait Reilly do get it – claim JSA and you bloody well do what the Jobcentre tells you to do. But since that did not hold when her JSA and that of others was docked then bloody well pay it back, with interest and accept you screwed up.

After all, the West Coast cock-up cost 50m and rising simply because of a lack of common sense – that’s what you get when you run an operation with consultants rather than competence – you end up not knowing what you’re doing. So less of this ‘protect the national economy’ bullshit. You protect the economy by plugging this particular loophole from now on. You don’t protect the economy by overturning the rule of law, chumps. I wouldn’t go as far as to say Cait Reilly deserves the money that was withheld. But she should get it, as should anybody else who was in that situation, because the Government needs to  respect the law.

Europe, Swiss move to limit banker bonuses and control fraud, Boris howls and Osborne takes it in the neck

The European Parliament often gets a bad press, but they are at least proposing a solution to one of the problems infesting capitalism at the moment, though it seems to me the plucky Swiss are way out in front here.

It is the principal agent problem, and it started to arise in 1993 when Bill Clinton tried to cap executive pay. He made a right bugger’s muddle of the job, because the way he drafted this simply incentivised everybody to lie to get round the cap. He probably shouldn’t have been in this space anyway. It is the job of the shareholders of a firm to sort out pay, though twenty years of executive thievery has dulled our minds to this basic fact. In the end a joint stock company is about raising money from people to do something profitable and then distributing a share of the profits to them. It isn’t actually a charity to fund lavish executive lifestyles, and the easiest way to prevent this happening is to have transparency in pay. Not necessarily a matter of public record, but the firm itself should have some idea of its pay liabilities, and a method of setting pay that is independent of the people being paid.

In the past you’d pay an employee a wage, and a bonus depending on performance in some cases, particularly sales. What seems to have happened is people working in finance in particular have got it into their heads that they are so clever, so brilliant, that they should all be paid by performance. However, sneakily, they talk about more pay for good performance. They don’t talk about putting £10 million in an escrow account where the employer can suck out a wedge if their performance is crap. No sir, we just want performance related pay for good performance. Lest it be said that I’m picking on bankers in particular, I note fund managers don’t waive their fees if they make a mess of stock-picking, they just quietly close down the fund and start again. Hedge fund managers and some investment trusts like to charge an extra fee if they do well and the fund rises in value over a year, but remain curiously silent about not paying back the equivalent malus if the fund falls. Go figure.

Back to the more general case of executive pay. Clinton failed to include performance related pay in the cap, so obviously nearly all pay became performance related. What sort of performance – well, whatever could be fabricated to pay more. Once you base pay on a fabricated set of metrics in the control of the payee and/or people under the influence of the payee then the outcome is going to be excessive  pay. It’s like leaving the till open – it’s going to get looted! The results are easy enough to see

ratio of CEO pay to average
ratio of CEO pay to average. Looks like the third peak was cut short by the recession, but the trend is still well up

In the past, most of executive pay was basic pay, with a bonus that typically didn’t exceed basic pay – indeed twenty years ago it was rare for a bonus to get up to half basic pay. Nowadays this is obfuscated by being ‘performance related’. For most of us performance related pay is, as a contractor wryly observed to me, a way for companies to justfiy reducing pay for permies. At the top, however, it becomes a licence to print money. It also skews incentive timescales – to make the performance call at the end of the year you have to scan back at most a year’s worth of performance. So PRP inherently favours short-term metrics, but since large companies aren’t pop-up-shops, decisions made at Board level have an influence on the firm’s performance that can last for many years.

That multi-year performance is what the shareholders get, but since PRP has to be called out annually, the Board has an incentive to take actions that favour this year rather than the future, and this is worsened by the shortening of executive tenure to less than three years on average. Heck, I’ve held stocks in companies longer than many of their CEOs have stayed, and this leads to a disturbing fact.

The shareholders are taking long-term risk, which doesn’t impact executive pay because they’re outta there when the chickens come home to roost

I don’t have a problem with high pay. I do have a problem with perverse incentives

You don’t build a FTSE100 firm in three years, though you can trash one that quickly. There’s nothing wrong in paying top dollar for ‘talent’, as long as you know why you are doing it. I don’t have a problem in paying someone 1000 million pounds if they add more than that much in value to the firm per annum, and using someone at 10 million wouldn’t cut it. I can’t imagine the scenario where that extreme would apply, but it’s a perfectly reasonable thing to do, a classic ROI calculation, if you can define the variables and risks with enough confidence.

What I do have a problem with is anybody getting any form of performance related pay that is more than their basic salary, because they should have a stake in the long term as well as the short. And it seems that Europe agrees with me. Boris Johnson thinks it’s all to do with hiding the mess that is the Euro, but then he would say that. Looks like Osborne failed handsomely in his attempt to water this one down.

There is, of course, the usual hollering from the vested interests, about how they will all scarper to Somewhere Else. Not so fast, people. Once you have paid back every red cent of the taxpayer bailouts, then yes, on your bike.

So far the evidence is that the bonus culture has incentivized bankers (in this specific case though the rot is wider) to drive like drunks and crash the whole economy. How much tax has banking put into the British economy over the years compared to the bailout money it has sucked out of it, and do we really want more of this white-knuckle ride? And yes, governments have been complicit in permitting the TBTF company to rise. However, the TBTF operations had far more resources to hand to embed themselves into a position where they could call on a one-way bet on taxpayer money underwriting their risk-taking because the alternatives were deemed to hurt too many people.

Gnomes of Zurich reined in
Gnomes of Zurich reined in

Meanwhile, over in that hotbed of anti-capitalist communism formerly known as Switzerland, a quiet revolution seems to be taking shape to address the excesses of executive pay. Again, there’s no problem paying someone a shitload of money, just that in shouldn’t be obfuscated in golden hellos, golden goodbyes, massive lumps of performance related baksheesh. It is transparency and symmetry that need to return to pay in business – with great rewards should go great risks. And the risks should be shared by those getting the great rewards, not just by the hapless company owners (that’s you and I as shareholders, or you and I as taxpayers in the most egregious examples). There needs to be rules of business so that information is available to all the stakeholders, so that they can choose what to capitalise and what to stay away from.

Kamal Ahmed’s Telegraph article is the usual trope being trotted out – ‘banking will simply up sticks and leave’. That sort of thing didn’t wash with the Swiss, who still seem to have the quaint notion that you should take some responisbility for your actions and not just socialise the risks. Perhaps upping sticks would not be such a bad thing. The British taxpayer is probably not good for another banking bailout, and it hasn’t got its money back from the last one. It’s about time the good citizens of an economy in better shape than most of the Old World took on the risk and stepped up to the plate next time. Alternatively, it’s about time that the multifarious top agents of capitalism wind their necks in and start taking part in the risks as well as the rewards of their tremendous brilliance. At the moment they seem to treat the whole thing like a video car game, where crashing the vehicle ends up in a reboot and start again. The rest of us occupy the real world, where their crash involves lots of wreckage and real people getting hurt. Let ’em howl.

Most people who have an issue with executive pay have an issue with the  amount or the ratio to average salaries as such. I don’t – some of the rise in the level of CEO pay relative to the grunts may simply be the increasing scale of companies. However, I do have problems with executives acting like the robber barons looting shareholders money and using opaque metrics to award themselves rewards without risks. All hail to the Swiss for calling this out and flagging the excesses without falling into the Clinton trap of trying to cap reward.

It shouldn’t be capped – but it should be as transparent as possible, so that the true owners of a firm have enough information to make a judgement call. That’s what needs regulation – simple, understandable pay and incentive schemes, preferably where the balance between the carrot and the stick is a lot less uneven than it is now. Golden hellos, goodbyes and handcuffs need to be limited too, because these are simply used as disguised bungs. If the firm wants to pay a shedload of money, do it. Over the table, please, not under it by sleight of hand.

No doubt the peddlers of the Global Talent Pool meme will screech. Sod ’em. Capitalism has done perfectly well so far with pay and bonuses that were understandable. If anything the increasingly short tenure of CEOs shows they aren’t that special compared to the people of a previous generation who ran firms for decades, really understanding them as opposed to in and out for a fast buck. I’m chuffed to see that it is the Swiss who seem to be making moves to spike this charade.