Darryl Boulton argues that talk of banning bonuses is just political posturing and makes no practical sense
Following last month's article (Wake up and smell the coffee) where I generalised somewhat about actuaries, I am being careful not to portray all members of a profession as the same. For example, not all bankers can be bad, can they?
Recently I opened a bank account in an Asian country. A requirement for opening it was that I had to purchase some ludicrously overpriced personal accident insurance that I neither wanted, nor needed. Additionally, they tried to sell me a savings product claiming an annual return of 7%. My actuarial training showed me the return was just under 2% pa (and the money would be tied up for 15 years). Oh dear, it looks like bad banking behaviour has gone global. Nevertheless, I write in support of bankers' bonuses. Let me explain why.
It seems that hardly a week passes without a politician denouncing these bonuses. But do they have the qualifications to allow them to speak so knowledgeably on the subject? England international footballer of yesteryear, Len Shackleton, was perhaps more widely known for a chapter in his autobiography entitled 'What the average football director knows about football'. There followed a blank page. You could say the same about what the average politician knows about running a business.
It's about appearances
Possibly, Tony Blair was the first modern political leader to recognise that it is style, not substance, that wins most votes. So now, seemingly, everything is done or said for effect. Feed your child a burger, pretend you are a churchgoer, look shocked at corrupt expense claims... it's not convincing.
My two favourite political figures buck this trend. Boris Johnson and Dennis Skinner may be from opposite ends of the political spectrum but I respect that when they open their mouths they actually say what they believe. Oh for more straight talking!
A futile exercise
Should they be banned? Should they be capped? Should politicians get involved? No! No! No!
Capping or banning bonuses is totally artificial and just political tosh. If you legislate on the size of bonuses then basic salaries will simply rise to compensate.
The real issue of course is not the size of the bonus, but what should actually drive these payments.
The best bonus schemes will align interests. Pay employees a bigger bonus when their action makes the bank more profitable. 'All' the bank has to do is make profits ethically and all is dandy. Banks will, of course, behave ethically, otherwise politicians will legislate to ensure this happens.
Scoring political points by 'banker bashing' is still in vogue but I am not holding my breath for the day when a politician comments intelligently on the subject.
To paraphrase ex-Liberal leader Charles Kennedy, allowing stupid people to vote is what we have to accept for the overall benefits of democracy. And to paraphrase an ex-colleague of mine: "Don't forget that 95% of the population is fundamentally stupid." Maybe the 'style over substance' politicians are not so daft after all.
All in the design
Designing bonus schemes is a job well suited to actuaries. Look at what drives profits, and make sure your scheme motivates individuals to act appropriately.
I managed a team of 12 graduates while working on pension reviews. They were a great team. They were all at least quite good, and worked very similar hours. But they were paid vastly different amounts. The most productive team member produced roughly four times the average output. Yes, four times. Such was the bonus scheme that his output was recognised and he was paid nearly four times the average too. He would never have got this salary elsewhere, but the more he was paid, the more profit we made. Everyone was a winner.
Good bonus schemes mean your best staff get paid the most and will be loyal to you. Underperformers should receive no bonus and so will often leave to join a competitor. So out with the wishy-washy 5% bonus-for-all rubbish. Find a way of measuring output (and quality) and reward your staff appropriately. I suggest that most jobs are suited to quantitative assessment.
Darryl Boulton is an independent actuarial consultant
