Fat Cat wants no Restrictions on Cream

Well, who’d have thunk it? Boss of Standard Chartered considers proposed European legislation to

cap bonuses to no more than salary

as preposterous. Usual codswallop “Bankers claim it could increase risk by leading to higher salaries. ”

Now I don’t think that’s such a bad idea at all. In fact it’s such a good idea I’m surprised it came out of the European Parliament 😉 Note it is not a restriction on pay. It is a restriction on the balance of pay and bonuses. The trouble with the bonus culture is not that the bonuses are large, it is the total lack of transparency and general moral hazard. The size of the bonus is only known after the fact.

There are some sorts of people we’ve always incentivised by bonuses, like the salesforce, who usually earn a low base pay and a larger bonus. However, in the not so distant past a decent salary and a modest bonus used to be enough to even get CEOs out of bed in the morning. The reason bonuses work for a salesforce is that the output can be easily quantified over the last year. Whereas the value added by a CEO is the devil’s own job to quantify. We can’t control for all the variables, so the default assumption is that he’s really great at this job. Why does that work for the CEO better than for some middle-management grunt? Because the CEO is the boss. What he says goes.

Businessweek seems to agree with me. It all started going wrong in the early 1990s, when Bill Clinton favoured bonuses related to performance. Now Clinton was a reasonably sharp cookie, but he achieved an epic fail here. “You get what you measure”, but if you’re in charge of the operation you also “measure what you get”.

That’s the rotten core at the heart of the whole performance related pay ethos. Who sets the Board’s targets – well they do. Quis custodiet ipsos custodes? So they inflate their pay, and good old Bill gave them the keys to the corporate safes. Company employees at the top have been looting it ever since, quite legally. Maybe it isn’t such a surprise that shareholder returns have been desultory since the dot-com bust, as this legalised thievery gathered pace.

What Diamond Geezer Bob did for Barclays shareholder value last year.

Now Diamond Bob might be worth every penny of his £17.7m pay over at Barclays, though some shareholders beg to differ. But wouldn’t it be so much more transparent to say this year we’ll pay him £9m, with a performance related bonus of £9m? It used to be how pay worked, it’s how it works (with the figures adjusted) for lowly grunts like me and everybody else below board level. And we’d see beforehand just how much Barclays is planning to pay it’s CEO.

Oh and we wouldn’t end up with reckless tossers taking excessive risks because when your bonus is 90% of your pay it incentivises you to bet the farm on nutty stuff that sometimes screws up so much that taxpayers have to bail you out.

In the end, what’s so wrong with a fair day’s pay for a fair day’s work, with the chance to double it if you fiddle the books right are a talented superstar with extremely rare talents capable of adding serious shareholder value? Shareholders, seeing all that awesome value you added last year may increase your pay this year and up the ante. Looks like a win-win here. There’s nothing wrong with high pay, if it really is necessary. But there’s everything wrong with a lack of transparency and control. It’s the shareholders that capitalise the company and take the risk, not particularly the employees. When Fred the Shred sunk RBS, all he lost was his job, it’s not like he was at risk of losing his life savings.

Thes Big Swinging Dicks need to relearn these facts of life, and that 50:50 pay:bonus split limit could be a good place to start IMO.