Bonus row not anti-business?

It’s not every day that your GOM finds himself in a measure of agreement with Mr Miliband, but this time he surely does have a point.

Let’s put the argument for bonuses first.

Some people, under some circumstances, are motivated by them. Not everyone and not all the time, but they can make a difference to business outcomes.

Bonus schemes are not confined to fat cats. Traditionally salesmen, factory workers on piecework and a host of people on modest earnings have a component of their take home pay based on “results”.

Bonus payments based on bottom-line business results represent an efficient way of controlling employment costs. When profits rise, pay rises. When profits fall, pay falls. It’s simple and good for business. (Note that this argument does not apply in the public sector.)

On the other hand.....

There is no established psychological relationship between output and the input, between the quantum earned and the effort put in. It’s not clear that people on sky-high packages work any harder or smarter than their predecessors on more modest incentives

Bonus schemes which are based on complex packages of results often do not make a lot of sense to the layman, the investor or the accountant. The increase in the level of bonus earnings of investment bankers over the last 20 years is a huge multiple of the increase in profitability or share price. One winner but lots of losers.

Some incentive schemes encourage behaviour that can be very damaging in the long term. Andy Haldane of the Bank of England has recently put forward a compelling argument that incentives based on RoE (Return on Equity) rather than the more inclusive RoA (Return of Assets) are in part responsible for the banking crisis.

The pay aspirations of the fatter cats are increasingly based not on absolute performance, but on perceptions of relative worth (by comparison with peers). Benefit consultancies use comparative (top quartile) indicators as the basis of their recommendations. This is logically inflationary.

So some bonus schemes, some of the time, can be “bad for business” if by that we mean bad in the long term for the investor, the middle-ranking employee and even the customer.

But all this is too rational. Much of the current furore is not about the principle at stake but the quantum. The gap between the highest earners and the median has gone skywards, and no-one has found a convincing argument to justify what looks like piracy. And as long as it looks like piracy, walks like piracy and quacks like piracy, it will be judged to be piracy and public opinion will put other values ahead of what may or may not be good for business.

After all it was ultimately public opinion that led to the abolition of slavery, and there were plenty of people around then who argued that this would be ruinous for business.