THE PENURY OF THE BONUS - guest post by Papa HeardinLondon (a relative point of view)

Bonus payments are miss-named. They are performance payments and are calculated on a formula based on the difference between expected minimum performance and the higher achievement of the person paid.



Who then decides the minimum performance criteria? How is such measured? Why is it possible for someone to so far exceed expectations year-on-year that he can reasonably expect to be paid several hundred percent more for merely doing his job, which in nearly every case is already hugely rewarded by stratospheric basic pay?



Most of the bonuses arise in the investment banking sector. Investment bankers are those who look at risk and decide which risk to buy and then sell at enhanced value. What are these risks? Who says they are a risk and who values them before and after purchase and sale? In many cases, there is no risk but only certainty. The sale is most likely to be to another bank that will, in turn, revalue the risk and sell on to make yet more.



Take the example of the National Lottery. When Camelot was given the contract to run it, it was as plain as the wart on the face of Cromwell to any electrician, carpenter, lathe turner or nurse, that whoever was to run the National lottery was going to make a killing. Not mere profit but stupefying shed-loads of money beyond the dreams of Croesus and avarice combined. The technology to run it was already there, cheap to install, cheap to run and foolproof. Those traders who wanted to participate (at the corner shop, the filling station, the supermarket) had to invest in the equipment.



All infrastructure was paid for by others. Camelot in fact made huge profit by merely selling the hardware. Once installed, there were the TV rights to sell and the spin off gambling side shows (scratch cards, “Lucky Dip”) etc, all adding to the pot of wealth already underwritten, not by Camelot but by everyone else, namely the punter – the public Joe. Thereafter, all Camelot had to do was to switch on the electric, sit back and plan how to spend the money.



Where was the risk here? There was no risk, of course. Never in the long history of man’s greed has there been a time when no one would be willing to turn a penny on a game of chance. Camelot had it sewn up. The day they signed that contract, they printed their own paycheque to mega wealth.



So it is with Investment bankers. In reality the risks they purchase are hardly risks at all, but near certainties to bring in wealth. Such is the incestuous relationship between bankers that of course they all flock like carrion to these near certainties, thus up goes the value and the price – job done, move on.



Has anyone really asked then how such vast tidal waves of money can slosh around in such a tiny pool as that inhabited by the piranhas of Threadneedle Street? Is it possible, one might innocently ask, if they all set values and charges at such excess levels for the solitary purpose of self gain at the expense of the end user – public Joe? Could it be that in reality, a risk is worth tuppence, but is falsely valued at £10, so that £9.98 can be shared as a bonus? And if the gullible purchaser at £10 then sells for £100, is he no longer gullible?



And no matter how clever, all seeing, astute or darn-right lucky a banker might be, is his making of any decision, or series of decisions, really worth three times or more the income of a hundred ordinary men? Or three times the income of a whole lifetime of one man? Every year?



If a banker and a lathe turner were marooned on a desert Island dressed only in rags, who would be the rich man then? It is probable that the man with manual skills would save both. In so doing and bringing them back to safety, what value would then the banker place on the efforts of his erstwhile companion? Is it remotely possible that he would rate his companion as worth 100 times his own esteem? He would not, of course, but he might magnanimously rate him as an equal. Briefly.



Every day we all make choices. We turn down one estimate in favour of another. In all cases we balance perceived value against quality. Sometimes we factor in other needs such as time saved. In all we do, we seek that balance, that sense of fairness and fair play. An Artisan deserves his profit, but not one hundred times his profit, or so we judge it. We refuse to pay £5 for ten toilet roles that can be had for £3 round the corner. We do not (usually) then take them round the next corner and resell for £4, but we could (and some do!) We all know we could never trade around the corner in toilet rolls priced at £300 each. Yet, in effect, the Banker does this.



The difference between the rest of us and bankers is that we have to sell our sinews, or brains our commodities, or vegetables to meet supply and demand. All that commerce is based upon the perceived value of the offer and represented by the payment of a sum of money. The banker sells just one thing – money.



Just as he hordes the cash, so he dictates who gets it and how much it will cost to get from him. By setting the cost of the money so high, he cannot but help to enrich himself, no matter how much you and I toil in the fields or under the cosh of penury.



So we have a choice – accept the bonuses or start your own bank.