Friday, February 06, 2009

Bonuses For Bankruptcy

This year's real bonus pool

In recent years, the public sector has wasted a fortune on management bonuses (eg see this blog). And it's about to get a squillion times worse.

When Tyler was a Civil Servant 30-odd years ago, we didn't get bonuses. You did your job, you got your salary (yes, OK, and your index-linked gold plated pension), and that was that.

But at some point, the mandarins must have looked at the private sector and thought aha, the reason they're so much leaner and fitter than we are, is because they incentivise their people with performance bonuses. We'll do the same and our performance will improve. QED.

Unfortunately, they failed to spot the vital point that the private sector has a much simpler objective. All private sector firms have to do is turn a profit, and performance bonuses can support that objective quite straightforwardly.

Tyler discovered that when he moved to the pre-Big Bang City. Bonuses were paid (albeit on a much more modest scale than now), and they were linked pretty directly to how much profit his division had generated during the year.

He learned how the old City partnership structures had used bonuses primarily as a way of de-risking the volatility of earnings. By paying partners - and later employees - a share of the profit in the form of variable bonus, staff costs could be kept in line with the firm's year-to-year capacity to pay. That was still the basic model, and there was a very direct linkage between profit and the bonus pool.

But the public sector is very different. It is not targeting profit, or any such clearcut objective. There is no bonus pool driven directly by the money available. Indeed, there is no transparent and robust linkage back to any real world objective. Just another pile of box ticking commissariat wibble.

The result is that public sector bonuses get awarded irrespective of overall performance. From failing HMRC managers, to failing DWP managers, to failing Learning and Skills Council managers, to failing Met Police Commissioners, to failing BBC execs, performance bonuses get paid irrespective. As a BBC spokesman put it, “bonuses are part of staff’s contractual entitlement”. In other words, they're part of salary.

When last sighted bonuses were running at £128m pa for the Civil Service alone. And the BBC bonus pool bill tops £20m pa.

But all of that pales into insignificance against the squillions we're reportedly now paying out to employees of our nationalised banks. Banks, remember, which are only being propped up with our money.

So WTF would we allow that?

One argument we've heard today is the BBC's contractural entitlement point. But what precisely does that mean? Sure, if a banker has a piece of paper spelling out the cash owed him by his employer, then the employer has to cough up. But I'd be prepared to bet most of these bonuses aren't anything like that clearcut - there's almost always a huge discretionary element.

And even if there is a formal quantified contractural entitlement, what if the employer has gone bust since signing the contract? In those circs, contractural entitlement or not, the employee is just another unsecured creditor. And right here and now, to all intents and purposes, our nationalised banks have gone bust. The only reason they're still doing the zombie walk is because we're propping them up.

Another argument is that unless we pay up on the nail, all those bright bankers will just leave. They'll go. They'll walk off down the road to work for... well... you know... uhhh... they'll be snapped up in no time... no, really, there's huge demand, and they are soooooo marketable...



The truth is that right now, in the financial world - just like at Ford or JCB - keeping your job is your bonus. We don't need to pay anything else on top. And to the extent we do, no way should it be cash - it should be in deferred stock, or maybe some of that toxic debt whose value is so fluid.

But I'm very much afraid our wibbly-wobbly "government" is no St Obama. Despite all the huffing, it is simply going to cave. It makes you want to spit.

PS Wonder how the backroom prep for Gordo's much-hyped London G20 meeting is going? We know he's desperate to pose as the economic saviour of the world, but as each day passes it's becoming more and more difficult to disguise the fact that his fellow "leaders" think he's an economic prat. Sarko's outburst yesterday was great: "When the English decided to cut VAT by two per cent, a certain number of politicians rushed to tell me that I should do the same. Since then, not only has consumption in England not gone up, it continues to go down... When you put your country into debt to pay for operating costs, you have nothing in return for your debt and you ruin the country. The English did that it's because they don't have any industry left. Gordon Brown cannot do what I am doing..." And that's on top of the beastly Germans (see this blog). Should be interesting in April. [Oh, one small point for future reference, Nick - Gordo's not actually English. It turns out he's a one-eyed Scottish idiot sent down South specifically to bankrupt the English].


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