The black, white and grey of "those" bonuses

Woman in the street , Beograd , Serbia.,
originally uploaded by xavier ..

After a longish short break the black and white economy comes back to life today, prompted by a question from a rather hot-under-the-collar Andy Hoang, creator of one of the internet’s greatest delights: www.myrealwall.com

“I've been thinking a lot about the economy lately, since becoming a homeowner specifically and I think there are a few objects I would like to see explained.


Firstly, why on earth do bankers get bonuses? Obviously the issue is big right now and centers on the size of the figures but I want to know just why they get them at all. Why can't they do an honest days work for an honest days pay like the rest of us? Also what right do they have to demand a bonus when the economy is on their knees due to their actions? Surely this bonus thing must have historical roots but surely accountability should be held when such bonuses are rewarded and can't just be seen as something they are automatically entitled to right?”

Right, Andy, let’s get to the bottom of this.


Firstly, why on earth do bankers get bonuses?

There are some practical reasons, some of which I’d say are pretty valid. The most obvious:

Being a banker is not just a day job. If you choose banking, you choose to give away your life for that time. We need you to get up at 4.45am. We need you to be here until 2am. We need you on the next flight to Baghdad. We need you to say no to that holiday you’re going on tomorrow with your family. We need you to go grey prematurely. And you can’t say no. Essentially, the bank you work for simply compensates you for not having a life outside work and your lack of sleep.

In terms of a bank’s setup:

They produce profit out of virtually nothing. Their core cost is their staff and those people have to be the best – if a bank is going to produce profitable output, it needs only the best inputs (much like comparing posh bar of chocolate with a nasty, vegetable oil saturated one). Banks are very secretive places and very sophisticated places. Before you begin you will, in most cases, have gone through an intense selection process, been credit checked to death and be a pretty sharp individual in your own right. People who meet this criteria and are willing to go through this process are not cheap and need to be lured away from less challenging jobs with cold, hard cash. But it’s worth it because hiring these people at what seems to be ludicrous costs to us, has been calculated as necessary for the business to make money.

Ideological reasons:

Recently, in a lecture, Joseph Stiglitz said “the banks believed they changed the world” and used this to legitimate the bonuses they pay. I won’t go into much detail about how they apparently changed the world, but I’ll just advise everyone to think back to the commentary we were hearing until mid-2008 from many leaders that the financial world had changed, we had gone past boom and bust, we were never going to experience another bubble. The banks (and many public figures) truly believed they had cracked a secret code and deserved to be rewarded handsomely for this.


What right do they have to demand a bonus when the economy is on their knees due to their actions?

In economics, we assume that firms are profit maximisers. So, imagine you get billions and billions in cash injected into your company, or get the option to take this, even if you don’t need it. What do you do? You would be absolutely insane as a business-minded individual to not a) take this opportunity and b) use it for you’re your firm’s advantage. So, here’s the scenario – the banks have taken the cash at zero interest, invested it wisely (which is, of course, what they should do best in their line of business), and derived record profits at a time we’re all feeling pretty down. Thus, they have over-exceeded their targets for a bonus.

Now – you could very well say that the profits from this profit should go to the tax payer but, the snag is clear. If we go back to the assumption above – firms being profit maximisers – then it doesn’t take a lot of brain to work out that, if the bankers knew their bonuses would be taken away, they would have done nothing at all as they would have had no incentive to put in the work. Perhaps by demanding a profit share, governments thought they’d make the global economic situation even worse (i.e. less economic activity = more job cuts = even worse recession) but we will now never know.
Anyway, Andy, the answer to your question is that it’s been too difficult for anyone to get their head round this – for every seemingly good and justified idea, there is potentially an ultra negative outcome, making governments too scared to pursue anything controversial.

Surely accountability should be held when such bonuses are rewarded and can't just be seen as something they are automatically entitled to right?

For me, the phrase “you can’t teach an old dog new tricks” comes to mind to explain today’s situation. You’ll have heard the phrase “too big to fail” many times, no doubt. What does this mean? Large national and international banks have such an engrained presence in everyone’s everyday dealing that governments would rather bankrupt themselves, than see banks go down the drain. Now, imagine this: you mess up completely, you completely screw up and take down a load of people with you. Then, instead of being punished, someone just gives you a tap on the wrist and sets you on you merry way, tutting behind you “oh those crazy kids will they ever learn”. How do you feel? Invincible, untouchable and wrapped in indestructible body armour would be my guess – so even more convinced you’re entitled to those bonuses.

There you have it. Are you brave enough to mess with them?

lplatebigcheese

Photo credit: Xavier Arpino, wonderful friend, cameraman and photographer working on projects such as this one: http://web.me.com/letempestaire/Le_tempestaire/Accueil.html

More photos from Xav: http://www.flickr.com/photos/xavierarpino/