Monday, 23 March 2009

Dominic on bonuses

Another imported Facebook note, also written in early February. I only wrote two of the planned "mini-blog" notes, which augurs badly for this actual blog, but hey, here it is.

Sorry, another note that fails to include 25 things about me. I'm sure you're all/both devastated. Anyhoo, I'm now going to unleash the second of my "a few" notes in this series. Topic, as in the title is bonuses.

Why bonuses?
Simple, they've been in the news lately.
Bonuses, in my view are a valid tool for persuading people to do their job properly. Not in all situations, but certainly in some. Ultimately, in many jobs, once you're in there's little making you work hard, except the hope of promotion or the desire for a good reference. From an employer's point of view, neither is a great way of making a large workforce work hard. Promotion can only be offered to so many people, and references are what you give to employees who have just left. This is why they offer performance-related pay.

How should they be?
Well, in a situation where your job has a very simple "success" measure (sport: winning trophies, most businesses: making money) then a logical pay scheme would offer you enough money to get by, plus a (hopefully) generous bonus for the profits you bring into the company. So far, so good. The trouble is, that company profits aren't straightforwardly £1 per transaction or £1m per transaction. They take into account costs for which an individual employee isn't responsible. Also, some work is more profitable than others and so forth. Also, not all companies make profits, even if some of their departments do. How do you even define the profits generated by the accounts department?
Therefore, some companies offer bonuses based on the firms performance, whilst others do so more on the basis of individual results. The first case is barely an improvement on basic pay (it has the advantage of being cheaper when times are tough). The latter case will encourage departments to be as profitable as possible (but perhaps at the expense of others). This is where the current situation comes in.

Current situation:
About a month ago, Northern Rock hit the headlines (again) when it offered staff approximately £9m in bonuses. This caused outrage, given the huge debt the bank owes to HM Treasury. It amounted, however, to about 10% of annual earnings for most staff, well down on the 60% that might have been available, according to documents in the public domain 4 months ago. The bonuses were paid because staff were exceding expectations in repaying the debt (allegedly by foreclosing on record numbers of houses, more on that in a minute) and so were rewarded for doing their job well.
Northern Rock famously had a bad set of loans on its books when it was nationalised, so it is only natural that many properties were due for foreclosure. I'm willing to believe that the bank was foreclosing on a lower proportion than usual of "underperforming" loans. Even in the current crisis, debt is debt, and must be paid. Eventually, and to someone.RBS has now raised further ire by offering its (much larger) staff up to £1bn in bonuses. In some cases, its staff are contracted to "minimum 100% bonus" - this I don't understand (why not just increase basic pay?) In other cases, its staff work in highly profitable departments (RBS is a VERY large firm) and in some cases, well, expectations must be met.
Basically, I feel that only some of these can be justified, but even those that can, shouldn't receive their bonus. Ultimately, if the best footballer played for a poor team, they wouldn't win, he wouldn't get his bonus. The team (RBS now, metaphor almost over) is failing, don't give the stars their bonuses.
Having said that, about 100,000 to 150,000 of the 177,000 staff son't actually earn all that much, and who am I to begrudge them an extra £1000 to £3000. An unemployed person, dammit, so begrudge them I shall.

Moral of the story:
Signing contracts you can't fulfill is idiotic. Gettting paid to lose money sounds like a nice job, if you can get it. And, if you get it - won't you tell me how?

No comments:

Post a Comment