the corner office

a blog, by Colin Pretorius

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On bonuses

These are various points on the bonus brouhaha.

  • It's inconsistent that many of the people who get most upset if you point out that incentives matter when it comes to social welfare, unemployment benefits, free medical care, schooling, etc, are the quickest to condemn bankers' bonuses because of the 'risks.' You can't have it both ways.

  • Incentive is one thing, how much impact it had is another. So far there's little evidence and what has been found is contradictory or goes against the 'conventional wisdom' entirely (read the paper and chase that citation around Google scholar for a bit if you don't believe me - for example this and this and this). The point is not that bonuses aren't bad or dangerous, just that the anti-bonus brigade's certainty is not justified and at least a chunk of the evidence points to them being plain wrong.

  • People hear the word 'bonus' and then the brain stops working. If you're earning 20k a year and get a 40k annual bonus, noone would say you're earning 20k a year, you're earning 60k. If you only get a 10k bonus the year after, you've taken a 30k pay cut. How many other labour markets have that much price variability?

  • I'll bet most people who bitch about bankers have no idea what bankers actually do. I'll bet half the 'bankers' earning big bonuses have no clue what the other half do. And if you don't know, you can't even *begin* to pretend to have an informed opinion about whether a person is worth their (annual) income or not.

  • The only people who should have an opinion are shareholders. Shareholders get the profits helped by a good bonus policy (whatever that is) and should bear the losses incurred by a bad bonus policy (whatever that is). If shareholders don't like their company's bonus system but lack the power to change it, then that's something that should be fixed. But then the problem isn't bankers, it's the government's crap company law, and the government can and should fix it.

{2011.01.15 - 15:56}

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