Friday, December 04, 2009
The Bonus fallacy and tournaments
Most people, I suppose, think of a ‘bonus’ as something extra. A pay ‘bonus’ in this definition means something earned by ‘defined exceptional circumstances’ – not something paid over as routine. So good work, increasing efficiency, improved customer satisfaction – all the might earn a bonus.
The ‘Financial Sector’ likes to claim that their ‘bonuses’ are just like this, a kind of posh term for ‘payment by results’ or ‘piecework rates’. This may be the kind of hot air that suggests the collective noun ‘a Wunch of Bankers’.
The reality may be the ‘Tournament System’ so ably described for lay readers in Tim Harfords book ‘ The logic of Life’. Specifically the chapter on ‘why your boss is overpaid’.
This is how I understand Harford’s argument.
Basically most jobs cannot easily be assessed by performance by results. And jobs that involve handling big flows of money are difficult to constrain in the public interest. So what happens is a pay system analogous to a top tennis tournament. The winner, the champion, the chair of the Board, is guaranteed a huge wad of cash. Second place wins much less but still a worthwhile consolation. The aim though is to inspire the twenty or so people in the immediate lower tiers to work their socks off in order to make the organisation work. They need to be guaranteed enough money not to be seduced into rival tournaments. In turn this premier league gives incentives for a strata of much less well paid potential contenders, the people who may actually create the wealth for the organisation if wealth creation is part of the deal.
It is actually irrelevant whether the people getting the top prizes are competent or even active in the organisation. All they have to do in this system is avoid doing conscious damage, and avoid distorting the company accounts too blatantly to make shareholders pay covertly for top corporate benefits.
But admitting that the pay structure is a kind of danegeld paid out to prevent other forms of legalised looting by corporate insiders would be highly embarrassing. So the term ‘bonuses’ has been conscripted to make the general public believe that some kind of payment by results is in place.
Trouble is that when huge losses are the financial order of the day, payment by results suggest no ‘bonus payments’, in the popular sense, should be made. But if you accept that the system is a tournament, it becomes unworkable without some element of obscene overpayments.
The RBS board (and others) are trying to maintain the ‘tournament system’ without actually admitting that is what they are doing. As I understand Harford, he also believes that an element of Tournament Economics’ is inevitable, so he does not suggest a solution.
Is Harford right? If so should we be bringing in the implications of ‘tournament economics’ into our political discourse?
The ‘Financial Sector’ likes to claim that their ‘bonuses’ are just like this, a kind of posh term for ‘payment by results’ or ‘piecework rates’. This may be the kind of hot air that suggests the collective noun ‘a Wunch of Bankers’.
The reality may be the ‘Tournament System’ so ably described for lay readers in Tim Harfords book ‘ The logic of Life’. Specifically the chapter on ‘why your boss is overpaid’.
This is how I understand Harford’s argument.
Basically most jobs cannot easily be assessed by performance by results. And jobs that involve handling big flows of money are difficult to constrain in the public interest. So what happens is a pay system analogous to a top tennis tournament. The winner, the champion, the chair of the Board, is guaranteed a huge wad of cash. Second place wins much less but still a worthwhile consolation. The aim though is to inspire the twenty or so people in the immediate lower tiers to work their socks off in order to make the organisation work. They need to be guaranteed enough money not to be seduced into rival tournaments. In turn this premier league gives incentives for a strata of much less well paid potential contenders, the people who may actually create the wealth for the organisation if wealth creation is part of the deal.
It is actually irrelevant whether the people getting the top prizes are competent or even active in the organisation. All they have to do in this system is avoid doing conscious damage, and avoid distorting the company accounts too blatantly to make shareholders pay covertly for top corporate benefits.
But admitting that the pay structure is a kind of danegeld paid out to prevent other forms of legalised looting by corporate insiders would be highly embarrassing. So the term ‘bonuses’ has been conscripted to make the general public believe that some kind of payment by results is in place.
Trouble is that when huge losses are the financial order of the day, payment by results suggest no ‘bonus payments’, in the popular sense, should be made. But if you accept that the system is a tournament, it becomes unworkable without some element of obscene overpayments.
The RBS board (and others) are trying to maintain the ‘tournament system’ without actually admitting that is what they are doing. As I understand Harford, he also believes that an element of Tournament Economics’ is inevitable, so he does not suggest a solution.
Is Harford right? If so should we be bringing in the implications of ‘tournament economics’ into our political discourse?
Labels: banks, bonuses, economic crash, economics, Financial markets, financial services, recession, tournements
Comments:
My father and mother are both bank employees, this is useful information for us about bonus and pay scales, i am here to find out some information about bank jobs, but this type of information we will get it very rare. Keep posting the new updates thank you.
Reshma M,
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Reshma M,
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Monday, October 20, 2008
Konjunktura nepabegs - keeping money in safe havens
‘The market will not go away’ a statement true in any language (in this case Lithuanian) because the dynamics of self-regulating systems adapt to any constraints regardless of what we may want to happen. So with the proliferation of bank deposit protection schemes, market awareness is leading to a scramble by some voluntary organisations to shift accounts between institutions to make sure that their money is spread between accounts that are individually covered to the maximum £50,000 This is quite a disruptive process…
With all the takeovers and so on there doesn’t seem to be a readily available roadmap though. Most people know that the Co-Operative bank owns SMILE online bank, so if you have a deposit in both you are ‘only’ covered to a maximum of £50,000 as the sum of both accounts. Useless to open anew account in one if you already have an account in the other. But if a bank now takes over another and you had deposits in both your maximum coverage is halved –and many may not realise this. Is the banking industry making this shift transparent?
Not all organisations seem to be covered by FSCS though. Are we in any way protected as a party for our party accounts?
With all the takeovers and so on there doesn’t seem to be a readily available roadmap though. Most people know that the Co-Operative bank owns SMILE online bank, so if you have a deposit in both you are ‘only’ covered to a maximum of £50,000 as the sum of both accounts. Useless to open anew account in one if you already have an account in the other. But if a bank now takes over another and you had deposits in both your maximum coverage is halved –and many may not realise this. Is the banking industry making this shift transparent?
Not all organisations seem to be covered by FSCS though. Are we in any way protected as a party for our party accounts?
Labels: banks, Financial markets, financial services, LibDems
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Tuesday, February 19, 2008
Vince Cable airbrushed out of heavyweight account of Northern Rock imbroglio
With great timing a new book I mentioned before lays bare most of the background you need to understand the Northern Rock imbroglio and what led to today’s Nationalisation moves.
I say almost, because for some reason the author, while discussing the events of Autumn 2007 (and indeed the previous few years) with considerable astuteness, utterly fails to mention either the warnings of Vince Cable or the other relevant interventions by economically superbly well qualified Liberal Democrats.
He can hardly have failed to notice these as he has been the BBC Business editor since February 2006 and previously was City Editor of the Sunday Telegraph.
Despite this huge gap in the narrative, Robert Peston’s book ‘Who Runs Britain?’ is well worth reading. It is on a lot more than NR…
Maybe we should go onto Peston’s blog and ask him for his assessment of the Cable contribution to understanding what is what in this matter, and perhaps why he failed to enlighten his readers as to who in the political world was trying to man the gates against the barbarians.
He does mention the piquant fact that the man selected to be executive chairman of the Nationalised Rock is enjoying non-domeciled tax status. However Ron Sanders intends to pay UK tax on his earnings from managing NR.
I say almost, because for some reason the author, while discussing the events of Autumn 2007 (and indeed the previous few years) with considerable astuteness, utterly fails to mention either the warnings of Vince Cable or the other relevant interventions by economically superbly well qualified Liberal Democrats.
He can hardly have failed to notice these as he has been the BBC Business editor since February 2006 and previously was City Editor of the Sunday Telegraph.
Despite this huge gap in the narrative, Robert Peston’s book ‘Who Runs Britain?’ is well worth reading. It is on a lot more than NR…
Maybe we should go onto Peston’s blog and ask him for his assessment of the Cable contribution to understanding what is what in this matter, and perhaps why he failed to enlighten his readers as to who in the political world was trying to man the gates against the barbarians.
He does mention the piquant fact that the man selected to be executive chairman of the Nationalised Rock is enjoying non-domeciled tax status. However Ron Sanders intends to pay UK tax on his earnings from managing NR.
Labels: banks, Vince Cable
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Wednesday, February 06, 2008
Meanwhile back with the Rocky banks..
A timely reminder that there is no such thing as THE Free Market untrammelled by ‘government’. All markets exist in some form of framework, if only to give us confidence to deal with strangers.
In the Financial Times (Feb 5th 2008) Martin Wolf explains why it is so hard to keep the financial sector caged and why it is important nevertheless to make the effort.
Discussion on Wolf’s article elsewhere (on Eurotrib) is of some interest, highlighting the implications of this approach as seen from a continental ‘anti Liberal’ worldview that sees the current uproars as ‘the Anglo Disease’.
In the Financial Times (Feb 5th 2008) Martin Wolf explains why it is so hard to keep the financial sector caged and why it is important nevertheless to make the effort.
….. the banking sector is the recipient of massive explicit and implicit public subsidies: it is largely guaranteed against liquidity risk; many of its liabilities seem to be contingent claims on the state; and central banks create an upward- sloping yield curve whenever banks are decapitalised, thereby offering a direct transfer to any institution able to borrow at the low rate and lend at the higher one.
The bigger point still, however, concerns macro-prudential regulation. As William White of the Bank for International Settlement has noted, banks almost always get
into trouble together. The most recent cycle of mad lending, followed by panic and revulsion, is a paradigmatic example…….In the end, we are left with a dilemma. On the one hand, we have a banking sector that has a demonstrated capacity to generate huge crises because of the incentives to take on under-appreciated risks. On the other hand, we lack the will and even the capacity to regulate it.
Yet we have no obvious alternative but to try to do so. A financial sector that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders is, I would argue, politically unacceptable in the long run. Those who want market-led globalisation to prosper will recognise that this is its Achilles heel. Effective action must be taken now, before a still bigger global crisis arrives.
Discussion on Wolf’s article elsewhere (on Eurotrib) is of some interest, highlighting the implications of this approach as seen from a continental ‘anti Liberal’ worldview that sees the current uproars as ‘the Anglo Disease’.
Labels: banks, crash, credit, economics, Financial markets, globalisation, government, taxpayers
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Friday, February 01, 2008
Who runs Britain? The super-rich and some other people
Interesting that it is the daily Telegraph (and not for example the Grauniad) that is serialising extracts from the book ‘Who Runs Britain?’ by Robert Peston.
Parts are very relevant to the current uproars:
And he goes on to spell out some of the political consequences, all too relevant in the current heated atmosphere over ‘sleaze’.
Individuals can distort the system in their favour for colossal sums, way beyond the puny efforts of Conservative MPs passing taxpayers crumbs to their families. Of Sir Phillip Green and his wife, Robert Peston notes:
Once more it is interesting that it is the Telegraph that is publicising this, which suggests that at least some of its business-orientated readers will not entirely approve. Even though the outcome of fighting off Green’s predatory bid seems to have been beneficial for M+S…
Read the telegraph extracts :
1 Pointing fingers at the plutocrats (here)
2 Hedge Funds: the new global super powers page 1, page 2,
3 Sir Philip Green (The bidder for M+S)
Robert Peston ‘Who Runs Britain? The super-rich and how they are changing our lives’. Hodder and Stoughton Feb 2008.
Parts are very relevant to the current uproars:
When the going was good, investment bankers, hedge fund managers and partners in private-equity firms all did very nicely from the bonuses and the capital gains and the fees generated by the frenetic manufacturing of deal after deal after deal. Many of them are now paying a price for failing to understand the risks they were taking on. Don't weep for them. They have already extracted fortunes. It is most of us who are paying for their foolhardiness, as the pricking of a financial bubble they created has a negative impact on all our prosperity.
And he goes on to spell out some of the political consequences, all too relevant in the current heated atmosphere over ‘sleaze’.
Why should any of us care? For one thing, it's not healthy for democracy. The new super-rich have the means through the financing of political parties, the funding of think-tanks and the ownership of the media to shape Government policies or to deter reform of a status quo that suits them… since 2001, the private equity doyens Sir Ronnie Cohen and Nigel Doughty have contributed £1.8m and £1m respectively to Labour, the former Goldman Sachs partner John Aisbitt has given £750,000 and the hedge-fund executive William Bollinger has handed over £510,000…. the biggest cost from the swelling of the super-rich class is an erosion of the fabric that holds together communities and the nation. The plutocrats who live here behave as though the UK is permanently on probation.
Individuals can distort the system in their favour for colossal sums, way beyond the puny efforts of Conservative MPs passing taxpayers crumbs to their families. Of Sir Phillip Green and his wife, Robert Peston notes:
(Green’s) greatest coup was to receive a divided in 2005 of £1.2bn from Arcadia, the retailing business he had bought in the autumn of 2002 with just a few million pounds of his own cash. Actually, it would be more accurate to say that his wife received the dividend. He is the grafter, probably the greatest retailer of his generation, and she's the owner. Why are the superlative assets in her name? Well, as luck would have it, she became a resident of Monaco before he set new records for extracting cash from old-established businesses. So by vesting ownership in her hands, any dividend paid would avoid payment of tax to the British Exchequer.
On this one dividend - probably the biggest ever paid to an individual in the history of British business - there was therefore a colossal tax saving, estimated at £300 million. It would have been enough to build 10 state secondary schools…You might think that depriving the public purse of such a sum might put him in baddish odour with the Government. But there has not been so much as a hint of unpleasantness. In fact, the lovable rogue of the British billionaire class was even knighted - for his services to retailing - just a few months after dancing around the tax man. Green is the matchless hero, the nonpareil of the new monied class. Understand him and how he made his pile and you understand 21st century jackpot capitalism.
Once more it is interesting that it is the Telegraph that is publicising this, which suggests that at least some of its business-orientated readers will not entirely approve. Even though the outcome of fighting off Green’s predatory bid seems to have been beneficial for M+S…
Read the telegraph extracts :
1 Pointing fingers at the plutocrats (here)
2 Hedge Funds: the new global super powers page 1, page 2,
3 Sir Philip Green (The bidder for M+S)
Robert Peston ‘Who Runs Britain? The super-rich and how they are changing our lives’. Hodder and Stoughton Feb 2008.
Labels: banks, Financial markets, globalisation, hedge funds
Comments:
The funny thing is that today's 'super-rich' have less money in real terms than the very rich of the past.
It is the political classes who grant favours to the rich in return for support who run this place. The class which has bred so many MPs on all sides of the house.
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It is the political classes who grant favours to the rich in return for support who run this place. The class which has bred so many MPs on all sides of the house.
Wednesday, January 30, 2008
A dozen banks collapse, depositors wiped out
Story in Wall Street Journal. Fortunatly this collapse is in 'Second Life' not on Wall Street proper or our own shores - though the make-believe financial institutions were taking in actual real world money from eager depositors.
Though as this Metafilter report (30 Jan 2008) makes clear things are really fairly hairy in the so-called real world.
Wonder if this secrecy is reassuring...
Yesterday, the San Francisco company that runs the popular fantasy game pulled the plug on about a dozen pretend financial institutions that were funded with actual money from some of the 12 million registered users of Second Life. Linden Lab said the move was triggered by complaints that some of the virtual banks had reneged on promises to pay high returns on customer deposits.
Though as this Metafilter report (30 Jan 2008) makes clear things are really fairly hairy in the so-called real world.
According to the latest biweekly numbers released last Thursday by the Federal Reserve, for the two weeks that ended January 16th American banks had negative $1.3 billion in non-borrowed reserves. This is, historically, extremely unusual; just two months ago they had $30 billion (positive, of course) in non-borrowed reserves. The only reason some banks haven't been shut due to insufficient -- negative! -- reserve requirements is that the Federal Reserve is currently loaning them enough money through the brand new TAF (Term Auction Facility) program (also running in Canada and Europe) to make up their shortfalls. Today's TAF press release says that 52 American banks or institutions are currently receiving loans totaling ~$40
billion -- but the Fed refuses to name who they are.
Wonder if this secrecy is reassuring...
Labels: banks, credit, Financial markets
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Tuesday, September 27, 2005
Bella figura or not as the case may be
If you want to get some handle on the sensational banking corruption racking Italy (courtesy not least of close colleagues of New Labours good friend Berlusconi) take a look at this piece by 'Gilgamesh' in the European Tribune. You wont understand what is happening from the BBC reports unless you read this. Also enlightening in the context of the Dutch bank ABN taking over Banca Antonveneta.
News report will also be trumpeting that Berlusconi has been 'acquitted' of certain charges. Well up to a point Lord Copper. It was very helpful that Italy has in effect made white-collar crime legal, according to this note.
Accidente!
News report will also be trumpeting that Berlusconi has been 'acquitted' of certain charges. Well up to a point Lord Copper. It was very helpful that Italy has in effect made white-collar crime legal, according to this note.
Accidente!
Labels: banks, corruption, Italy, scandal
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