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.

Fat Cats and the Power Of Wealth

The Daily Mail has a shock-hold-the-front-page kind of diatribe about FTSE fat cats getting paid 145 times the average pay in their companies, and when you look at the slice of national income taken by the top 0.1% of earners the profile is quite remarkable.

The share of UK income taken by those on the top 0.1% of the income range

It’s hard to get a handle on something like this. I postulate that what it shows is the gradual shift of post-war power away from capital towards labour and back again. There seems to have been a low-water mark round about 1978 in the slice of the national income taken by fat cats, followed by a gradual rise.

What would actually be more interesting to me is the distribution of wealth according to income slice. It isn’t your income that determines whether you have a yacht or own your house. It is your accumulated wealth. Obviously if you earn £1,000,000 p.a. then you can do in two months what it has taken me 20 years to do, ie buy my house outright. However, I did get there in the end, by accumulating wealth, even though I am unlikely to earn £1,000,000 in my entire working life.

Anyway, what’s the story here? FAT CATS ARE GETTING ALL THE MONEY, LYNCH THEM!!!. Or is it?

It certainly wasn’t in 1978, when the fat cats took about 2% of the national income.  If you’re a fan of The Spirit Level, catchphrase “why equality is better for everyone” then you’re probably also a fan of whatever happened between 1956 and 1986, culminating in 1978, which seemed the spread the fat cats’ cream more widely amongst the mangy alley cats too.

Before we get all dewy-eyed about 1978, let’s remember what it was like then. It was the Winter of Discontent. Rubbish was piled high in Leicester Square. We had lowlife varmints like miners’ union boss Arthur Scargill running the country, whose hired goons “accidentally” dropped concrete blocks on taxi drivers from motorway bridges.

Be careful what you wish for – if you want income shared more equally, it means lending power to all sorts, including people like Art’. The optimum probably lies somewhere between what we had then and what we have now, but I will leave that to cleverer people than me to figure out.

So I then thought I’d run the query again, looking at the amount varying slices of the top take. Presumably in the top 10% is included the top 0.1%, but anywy the results puzzled me. From a cursory glance it would appear that it is the 10-1% slot which is running away with all the lolly, so the figures would indicate it is the medium sized cats that the jealous should string up. But there are a lot of them. And if anything they are doing rather well, well, they were in the mid 2000s.

Bearwatch has an interesting thought experiment into how things get this way. If he’s right, then perhaps if you want the outcomes that are approved of in the Spirit Level then probably Karl Marx was right, you have to go after the means of production and get it in the hands of the proletariat. Now where did we try that and how did it turn out?

The share of UK income taken by those on various slices of the top income ranges

This still doesn’t really deal with the wealth effect. It is one of those ironies in life that, provided you do not spend up to your income, you accumulate wealth. Poor people buy Stuff that they consume, rich people buy assets that produce an income. I used to buy Stuff, now I try and buy income. At the moment I wouldn’t go as far as to say I am rich, but then people rarely do view themselves as rich. In some ways I am – I own my house outright, and I have good health.

In many other ways you are probably richer than me. I drive a 1999 reg car with > 120,000 miles on the clock, I don’t own a mobile phone, I don’t have Sky TV. My computer is elderly, it was bought in 2005 under the Home Computer Initiative. I don’t have a video games console or a flat panel TV. I haven’t been on holiday for the last three years. Half the time I ride a bicycle to work. I could afford to change all of these to closer to the norm, but I choose not to, because buying an income is more important to me than any of these things.

It is far easier for me to save, now that I am about to see 50 summers, than it was when I had seen 40. The reason is that a lot of the costs in life are associated with a large capital purchases of Stuff, like your house, so once that is paid off you have more money left. Even if you haven’t paid it off, if you have savings you can take advantage of bulk deals, you don’t have to use expensive loans, you can get some income from investment, everything is working for you. Money attracts money.

In the last 12 months I have saved more than I saved in the 12 months before, which was more than in the 12 months before that. Some of this is through deliberately targeting costs and gaining skill and experience with that. Some of it is because investments are paying me a return. Double glazing reduces my power bill. So does my wood burning stove.

Of course, ostentatious consumption is a good part of being a Fat Cat, so I am disqualified as I have to take the frugal route. Lloyd Blankfein doesn’t need to worry about frugality while he’s doing God’s work at Goldman Sachs.

However, he probably accumulates wealth faster than I, because in the end there’s only so much clobber you can spend money on. Plus Lloyd Blankfein may be directly descended from the Bad Guy downstairs with the pointy tail and sulphurous breath, but he didn’t get to be head honcho at Goldman Sachs by spending more than he earned, unless it was to buy power and influence – assets again!

Looking at those graphs, I would say we are seeing a reversion to the mean in terms of wealth distribution. Old money owned all the stuff in the 19th century because they controlled the means of production, primarily land. Corporations will probably own everything in the 21st, once again because they control the means of production, and often the access to customers. At least while they can still pump oil out of the ground, they will, after that there may be a shift back to the power of labour in the ensuing bunfight. Or we will get indentured servitude, or slavery perhaps, but in an energy-challenged world it will probably be more local, up close and personal, rather than Apple, McDonald’s and Coca Cola owning the United States of Earth.

Corporations will try and favour machinery over human labour, both because for a lot of things it is more effective, and because it is cheaper. I still recall as a kid seeing huge phalanxes of men coming out of factories at the end of the day’s shift – I wouldn’t know where to go to see such a spectacle in the UK now.

The big question has to be what the heck happened in the middle years of the 20th century? My parents saw a gradual improvement in wealth distribution, but all through my own working life I have seen an continuous degradation in wealth distribution. What on earth was the countervailing force to the tendency for money to accrete to money?