Saturday, 18 February 2012
So why exactly do bankers get a bonus? Starting with the reality for the vast majority of bank workers bonuses aren’t 6 let alone 7 figures. Heck 5 is way better than most. That aside, the thing to bear in mind is employers luuurve the bonuses because they’re discretionary and as such a powerful lever, which means stuff like:
1) They’re non-pensionable. Base salary 20 grand, bonus potentially another 30? Tough, you’re pension is set entirely in relation to the 20 grand. But, when you advertise the job you talk about the 50, i.e. you spin things.
2) This has an appeal to employers cos offering more money means a wider pool of candidates to choose from when recruiting, but for less than it actually appears (this is an uncomfortable point to make because it’s predicated on the assumption some people are better at shit than others, which the credit crunch obviously challenges even if it is still true on average).
3) Bonuses are flexible. Good year for profits? Bonus. Bad year in an organisation where labour is a key if not the key cost? Cut the bonus and cut the costs i.e. what employees, based on years of experience, regard as a routine part of their total pay can be readily flexed to suit without all the negotiated shite you’ve seen in the public sector over pay freezes.
4) Bonuses can be used tactically, like is she no earning as much as he is for doing the same job? Well then she’ll get a bigger bonus than him won’t she (ideally). Gendered pay inequality? Not on a total package basis (ideally).
5) Oh, oh, now she wants to leave for another employer, there’s a dependency on her and it’d cost what she earns and then some to replace her, then train up a replacement. Pay a big bonus and hopefully she’ll stay.
6) Alongside shit like that bonuses are actively and aggressively used to encourage effort. Hence the sustained periods of free overtime, lip biting when given yet another unreasonable request, travelling hither and thither at the drop of a hat and so on shit that makes up private sector work. Like consider the following couplet: TOIL? Yes! Bonus no. TOIL? No! Bonus yes.
7) Finally banking is about sales. Rather than bonus you’re probably better thinking about a lot of what bankers get as sales commission. Except, banking is too “posh” to see things that way, hence the use of the word bonus.
As for those not selling product, like me fer instance, the potential discrepancy between sales jobs that pay a basic wage plus a commission (i.e. a bonus) and every other job would be so large, no one would want to work in back office roles or at least no one worth a damn. Hence, bonuses across the piece serve to lubricate organisational labour markets (however, don’t think for an instant that back office roles pay the same kind of bonuses sales people get. They don’t).
Please don’t confuse any of the above with justifying the way things are. I can think of huge great examples where bonus arrangements have been bent, buckled and gamed typically by high heid yins intent on awarding themselves bigger bonuses at the expense of as many people beneath them as possible; in practice the system is flawed and abused. And personally, I’d much rather get a one off pensionable pay increase and have done with it. Except that would run counter to how employer’s actively use bonuses as a means of asserting managerial discipline so it ain’t gonna happen.
But, please do note none of the above has much if fuck all to do with a bonus being a reward for exceptional effort and/or performance, which appears to be the Labour party line. Realistically, if you work in finance and don’t get a bonus, chances are you’ll be getting managed out the door within the next 12 months. Essentially, the Labour party rhetoric is an appeal to potential voters who don’t participate in, know or recognise this system. Like to compare and contrast, in the public sector length of service is frequently king. Another year? Another increment thank you very much. Except the notion that an unpromoted teacher with say 4 years service is genuinely worth less than one with 5 years on a consistent basis across the piece purely because of that 1 extra year is facile (and a reminder of the different bargaining power labour currently has in the public sector).
As for 6 and 7 figure bonuses I’ve no idea. I saw a scratch card recently called “Rich for life” that paid winners £40 grand a year for life. That, it would seem, is what most people regard as rich (I know I’d certainly jack it in if I’d won). Comparing that to all the headline grabbing bonuses, one very obvious point is that when you think about the recipients of those you’re dealing with a different (frequently psychopathic) mind set altogether. Hence, my view that when it comes to big bonuses you need a sociology rather than an economics of pay because what most folks regard as normal simply doesn’t apply.
Friday, 17 February 2012
Oooh I forgot the Brit awards were looming,that big red carpet thang where the record companies threatening to get people locked up ten years, THAT'S TEN FRICKING YEARS!, congratulate themselves in a manner designed to sell more product during the post-crimbo sales lull. Anyhoo, you can’t seriously justify internet piracy. But, some context would be nice, that and some history of the megacorps on whose behalf tax payer funded public servants are threatening to lock ordinary punters up for 10 years *.
Starting with the history, from Brothers in Arms onwards major record companies spent over a decade profiteering from people replacing their LP collections with CDs, doing little more than sitting back and reformatting their back catalogues, all the while pissing away easy profits on “flowers'n'chocolate” and shit bands.
Of course all good things come to an end and eventually it became apparent there were only so many special, special, deluxe editions people were willing to buy before they started asking why the damn things weren’t remastered with bonus tracks in the first place. The record companies by this stage were presumably hoping for another format to emerge and it did, kind of.
Unfortunately for them it was the combination of MP3s and Napster. As a result the record company business model of the latest thing releasing one single, then another, then touring to promote an LP (auto-repeat 12-18 months later) plus ripping off punters via back catalogue CD sales started to creak. Interestingly, this business model was and is similar to pharmaceutical companies, another set of marketing and distribution machines that exploit little legal monopolies for as long as and in as many ways as possible. Anyhoo when Napster appeared the record companies responded in a predictably legalistic fashion with Lars Ulrich for some reason becoming the multi-millionaire fall guy intent on undermining any cool, hip or happening cache the recording industry had ever tried to claim.
Napster lost, the record companies won, but other methods of distributing pirated material had already appeared. The point they embodied was straightforward; record companies had repeatedly proven to be incapable of developing new business models that met emerging consumer demands because they were focused exclusively on preserving an existing one dating back to the 1960s (but not in a hippy way). In simple terms record companies were shown to be shit at business and addicted to the strategy we know and love today of using the law and lobbying to mask their failings.
And so it continued to the point where it reached ridiculous levels here when Feargal Sharkey, as the UK record industry’s spokesman, claimed publically that record company sales are a key contributor to the UK balance of trade and A&R is capital investment in a lets all borrow big boy chat and pretend Simon Cowell’s talent shows and stuff like say Sony, rather than "investing", simply buying Creation records so it could acquire Oasis didn’t and doesn’t actually occur (the parallels between that and say Glaxo buying a small business that’s developed a new drug are uncanny). More off putting was the record industry essentially writing the Digital Economy Act that Labour rushed through as one of their last acts in government after Peter Mandelson had some good times on David Geffen’s yacht.
I say ridiculous for various reasons. One, Feargal shall now be forever remembered as a wanker for reasons other than Teenage Kicks. Two, trendy record companies are repeatedly bringing the heavy-heavy handed legal threats at the same time as trying to be well, trendy. And three, they're continuing to use our legal system to hide their inadequacies as businesses at the same time as claiming to be a British business success story.
What the record companies now want is open to debate. One option I’m sure they dream about is taking us back to the early days of the last decade when you (well me) paid up to £21.99 for a single CD and that’s that really. The price hike in Whitney Houston greatest hit CDs following her death that was quickly put down to technical error (aye fucking right) supports this view. But, speaking as a consumer, would them being able to charge me anymore make for better product? Not going by past experience it wouldn't, rather the main difference it would have made was that Guy Hands top of the cycle, over paid leveraged buy-out of EMI would have probably worked, and that's kinda it really. The 80s, after all, when CDs emerged and profits were easy, was also the decade taste forgot as every second hand record shop bargain bin proves. Alternatively, record companies want to buy into something more akin to the cloud computing model other people have devised wherein nobody owns anything, but in exchange for a monthly fee can rent stuff for immediate - but restricted - consumption.
Either way, actually neither way, they just want people to stop pirating their product regardless. You’re left with the sense that while Britain may make the best popular music, the owners of the resultant copyrights are shite businesses. They may claim, when it suits and it isn’t the post-Christmas sales lull music award/ marketing season, to be just another business, which is fine, but can we please acknowledge that what they mean by this is they're more British Leyland than Tesco?
As for other media, fucks knows, just different flavours of exploitative, deceitful scum as the multimedia conglomerate News Corporation with its bye bye News of the World, hello Sunday Sun proves. Sky TV is a cash cow so they’re clearly still in the money and cinema is doing well give or take DVD sales presumably though here you’re left with that annoying thing of only stuff you legally buy comes complete with anti-piracy stuff you’ve no choice but to sit through.
The thing is though another reason music sales fell was because other, competing distractions appeared. It wasn’t just that people were choosing to download stuff, they were also spending more of their time playing games and surfing the net. And with their being only so many hours in the day (something the Digital Economy Act foolishly failed to address), something had to give. The other thing, the big thing no media conglomerate is willing to admit is the repeated finding that those most likely to download pirated material are also those who spend the most on legal stuff i.e. pirated stuff is as well as not instead of. Hence, the £15m p.a. losses record companies claim the RnBXclusive.com website induced are talking bollocks in a why are these people being allowed to tell such blatant lies at the same time as they’re getting to threaten people with severe legal action?
Thankfully, with the shutting down of megaupload, the emasculation of filesonic and so on we’ve got some lovely data emerging that can be used to empirically test all the media conglomerate shite about piracy; now that stuff isn’t as readily available as it was are legal product sales on the increase? Well? It’d also be quite cool to get a handle on the unintended consequences of going after easy targets/encouraging people to go underground to get pirated material.
In the meantime can we at least acknowledge the fact that the media conglomerates intent on criminalising vast swathes of the population have an undue influence over the legislative process, are ridiculously exploitative and have proven repeatedly incapable of adapting to new technology and changing consumer demands? That and the fact that because of them the living stain of faux big-sister diarrhoea that is Jo Whiley was used to explain the “mighty” Digital Economy Act on Panorama, a crime for which no one shall ever be forgiven.
* You’ve got to love the way that once the story broke and made it into the mass media the 10 year threat was taken offline. You’d almost think a PR/marketing bod suggested aggressively threatening to criminalise punters was perhaps not the best thing to do.
Wednesday, 8 February 2012
Professor Andrew Lo’s review of 21 books about the financial crisis is a lovely thing in principle; he read them so you don’t have to. Professor Lo also abstracts from the various interpretations kicking around to make some interesting points, or at least tries to in a here’s MY review, oh yes, MY review of things kind of style.
The one that got me because it’s so topical was his footnote 'n’ quote driven dissing of the following notion that he says has “become part of the folk wisdom of the crisis - Wall Street compensation contracts were too focused on short-term trading profits rather than longer-term incentives. Also, there was excessive risk-taking because these CEOs were betting with other people’s money, not their own.”
Instead, Professor Lo responds with “in a recent study of the executive compensation contracts at 95 banks, Fahlenbrach and Stulz (2011) conclude that CEOs’ aggregate stock and option holdings were more than eight times the value of their annual compensation, and the amount of their personal wealth at risk prior to the financial crisis makes it improbable that a rational CEO knew in advance of an impending financial crash, or knowingly engaged in excessively risky behavior (excessive from the shareholders’ perspective, that is). For example, Bank of America CEO Ken Lewis was holding $190 million worth of company stock and options at the end of 2006, which declined in value to $48 million by the end of 2008,5 and Bear Stearns CEO Jimmy Cayne sold his ownership interest in his company—estimated at over $1 billion in 2007—for $61 million in 2008.6 However, in the case of Bear Stearns and Lehman Brothers, Bebchuk, Cohen, and Spamann (2010) have argued that their CEOs cashed out hundreds of millions of dollars of company stock from 2000 to 2008, hence the remaining amount of equity they owned in their respective companies toward the end may not have been sufficiently large to have had an impact on their behavior. Nevertheless, in an extensive empirical study of major banks and broker-dealers before, during, and after the financial crisis, Murphy (2011) concludes that the Wall Street culture of low base salaries and outsized bonuses of cash, stock, and options actually reduces risk-taking incentives”.
Phew. Except, hmmm. No. Actually this is what you call knowing the price of everything and the value of nothing. If I were inclined to do the math(s) or even the arithmetic, I’d note how Ken Lewis’s wodge of stock fell over 74% in value. Ouch. I mean crikey the credit crunch cost him at least $142m. Ouchy, ouch. Over here where executive pay hasn’t yet reached American levels you could do the same kind of thing for the those who ran the subsequently bailed out banks into the credit crunch or at least you could in percentage terms, but absolutes? Nah, they lost millions not tens or hundreds of millions.
The thing is though even after all these terribly important people lost all this dosh (well actually they didn’t cos it was shares they’d have had to sell to get their hands on the moolah), they were and are all still very rich. 1% rich even i.e. the “penalty” for (some of) the people who caused the credit crunch is that they’ve tumbled all the way from fuck me they’re rich to fucking rich or to quote the handy dandy Institute for Fiscal studies online questionnaire about where you are in the distribution of income in the UK - if you were on Mr Goodwin’s pension right now you'd discover “Your income is so high that you lie beyond the far right hand side of the chart”.
Hence, references to “risk-taking incentives” are beside the point; these people simply weren't taking any meaningful economic risks or at least not ones even remotely comparable to say I don’t know the printers currently being asked to vote on a 10 to 20% pay cut. So whereas yer average punter isn't taking the kids on holiday this year and is having to watch the weekly shop like a hawk, for a Ken Lewis all this means is buying 2 rather than 10 new Bentleys.
Instead, rather than an economics of pay, at these levels an open and honest sociology makes far more sense. Some of the obvious stuff this would have to draw attention to would be as follows; every year the charismatic, experienced and successful people (no seriously) that make up the board of yer typical PLC take their CEO aside and tell him that he’s so insightful, strategic and lovely, so best in class and thought leadery that he as a person is worth millions and millions of pounds. Not just one, or two, but millions and millions. And see that corporate jet you wanted? It’s over there. A chauffer? He’ll be round tomorrow morning. And apologies for not asking before, but do you like your grapes peeled or unpeeled?
Now, the notion that such institutionalised, positive-reinforcement didn’t, doesn’t, couldn’t or can’t turn an executive or a trader's or anyone's head is ridiculous. Rather, the way Professor Lo presents Wall Street contracts as a folk-loric contributory factor is a convenient straw man. Sure sure those in charge lost big arithmetically, and? A crucial and key driver of the credit crunch was an arrogant hubris that reached monumentally destructive levels. And this hubris WAS fed by Wall Street contracts (along with those signed in the City of London and elsewhere) that awarded fortunes every year and were primarily set in relation to how rival egos were being similarly massaged.
Personally, I think Sarah Beaney’s Property Ladder telly programme still illustrates this better than however many books on the financial crisis; every episode some dicks bought a house to develop then spent so long fucking it up the rising market meant they still made a profit. Except they actually believed this was due to their great acumen and risk taking endeavours as opposed to fortunate circumstance. So was executive and banker pay a factor? You totally betcha! And no, not because of the absolute amounts at stake, rather it was the relative numbers presented each year on paper and the impact that and the associated rituals had on the egos of key individuals.
Like Ken Lewis, I'm sure, thought he was the dogs and why shouldn't he? Every year he was handed a multi-million pay package and as we all (used to) know people awarded that amount of dosh don't make catastrophic decisions. So sure he had a lot to lose, but does anyone think that when Ken made decisions he seriously took into account the possibility of him actually losing well anything really? Like really?
The other thing are the challenges now being made to it all. Like we’ve been told for however long that the rich need to be rich because then we’re all better off, except no we’re not actually. Or, as is the case here, we get references to “an extensive empirical study of major banks and broker-dealers before, during, and after the financial crisis, Murphy (2011) concludes that the Wall Street culture of low base salaries and outsized bonuses of cash, stock, and options actually reduces risk-taking incentives”. Except no they didn’t i.e. dull stuff like reality makes utterly fucking clear the current system didn’t and doesn’t work as a means of risk management let alone wealth creation for society as a whole.
Rather, Gramsci’s theory of hegemony and how the ruling class defines the common sense of an age is what's increasingly relevant because the "common sense" we've been fed is thankfully and increasingly being questioned in ways that expose it as a pile of self-serving shit.