Wednesday, 30 September 2009

Dysfunctional Bonuses - It's Not Just the Bankers

There's something about bonus that becomes a fetish, frequently invested with more significance than its actual financial value - more, say, than a pay-rise of equivalent value.

This runs deep in human psychology: I've elaborated it a little
here. The thought of being awarded that discretionary
something extra really grabs the attention of mortal beings, who will do almost anything to be acknowledged and treated thus.

We hear a lot about how this has led bankers to misbehave: but through the era of NuLab the cult of
bonus has spread far and wide, including to the public sector. Now public sector occupations typically lack the objective financial metrics against which profit-seeking organisation can (at least in theory) construct rational bonus schemes. So they invent metrics, generally based on ill-judged targets and poorly-quantified assessments of 'output' or, even worse, of input.

Result: the beneficiaries of the bonus scheme are incentivised to fiddle the less-than-objective figures which, such is the fixation on
bonus, becomes a pre-occuptation. Every Police commander, every PCT boss, has a vested interest in massaging the data. With the grotesque consequence that, as Andrew Neil skewered a gibbering Jackie Smith with yesterday, none of the 33 desperate 'phonecalls made by Fiona Pilkington were logged as a crime: so no-one believes NuLab's rosy crime figures.

When the best brains in the Treasury are being bent to curb dysfunctional incentives for bankers, could they therefore broaden their scope ? We do indeed want to incentivise purposeful behaviours. There is a real conundrum here and it badly needs sorting.


ND


15 comments:

James Higham said...

A bonus does become a fetish, Nick, perhaps because it leads to more money in the pocket.

Steven_L said...

What's this Nick? You want the government to exercise some common sense?

We don't get any bonus's in my line of public sector work, but the 'performance indicators' aren't half stupid.

They are just there so senior civil servants have something to talk about in job interviews.

It all boils down to how public sector recruitment and pay grading works if you ask me - i.e. centralised planning.

Blue Eyes said...

You mean the annual bonuses which the government is going to crack down on could be replaced by annual pay rises????

Anonymous said...

On ething about BONUS is that it is not pensionable, or have I missed something

hatfield girl said...

A better understanding of the New Labour state can be gained from studying centrally planned economies (if you can bear it)and the reasons for their failure. Without market measures, incentives introduce gross warping of economic behaviour. The literature is extensive as you know, but why are New Labour reinventing the wheel?

electro-kevin said...

It depends on what kind of behaviour is being encouraged. I'd gladly pay senior police officers and politicians thrice as much if only they'd BLOODY WELL DO WHAT THE VAST MAJORITY WANT THEM TOO !

Budgie said...

So MPs expenses and 'house flipping' isn't a bonus?

Houdini said...

The civil service now has a bonus culture that really does need curbing. Just a couple, out of hundreds, of examples is that tens of millions of quid in bonuses were paid to HMRC this year even after they admitted losing 2billion and making massive mistakes. DEFRA had a massive bonus culture while messing up farm payments and causing the death, literally, of farmers through suicide.

Bonuses do need sorting out, but not necessarily for bankers.

Anonymous said...

Having been offered and accepted very insignificant bonuses (by investment banker standards). While a bonus is a nice to have and for that reason I make a point never to turn one down. I would make the case for a regular annual increment.

Letters From A Tory said...

Very good point. The police have no incentive to actually record crime when it happens unless it contributes to their targets, and the government has no incentive to make them record crime either.

Nick Drew said...

my main point is quite a limited one: there's something about bonus ... - qua a discretionary goody, whether large or small, as it impacts the human psyche

it sits, of course, in a world of complexity: tax, pension, metrics, markets, planning, politics (with and without capital 'p') ...

Tom P often links to some good material around the human decision-making theme

it's not new: but with so much dysfunctional behaviour around, well ... I'm not sure that 'Nudging' is enough

Budgie said...

Anon 11:35pm said: "I would make the case for a regular annual increment."

Wouldn't we all?

As a one man band my turnover is less than half what it was the previous year. And even in that good year my turnover/pay was no where near the 40 percent tax band.

Anon, you are living in a cosy, protected dream world; wake up and smell your P45.

Saturn v said...

In the private sector we often have 'bonuses' withdrawn.
Almost everyone I know, self included, has had a performance or sales bonus rejigged to become worthless.

Weekend Yachtsman said...

The point about bonuses is that they are sometimes significant and that they (oops sorry, the TWO points about bonuses) are usually directly related to your own efforts.

Thus for recognisable real hard work you get a bit of handy cash - or sometimes quite a lot of handy cash.

Whereas in most big companies, the difference between the top and the bottom of the scale of regular salary reviews is maybe a 1% rise if you're rubbish and a 2.5% rise if you're the best thing since sliced bread. Frankly it's not worth the effort. Knock your pan in all year for an extra £30 a month after tax? No thanks. But a few £000 in the hand all at once definitely is worth the effort.

Hence bonuses.

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