No big bonus for failure

2008-10-27 09:36

Chris Moerdyk

This is the plan. Banks that governments have had to bail out in the two two weeks won't be allowed to pay their tops execs huge salaries and bonuses anymore. Which should make ordinary people like you and me very happy.

The Australian government has gone even further and is talking about forcing not just banks but all big companies to cut back on big salaries and bonuses. Which should make ordinary people like you and me even happier.

Because, when everything is added up, we're the ones who are actually paying all those big salaries and bonuses. So, anything governments can do to get rid of all this out of control corporate greed the happier the consumer should be.

Unfortunately, I can't see it panning out that way.

It seems to me that if you take away corporate greed the whole capitalist system will pretty well collapse or at best just become a lot less efficient. Which in turn will mean that the price of goods and services will become more expensive not cheaper.

Returns

Let's look at the way things work in big business. Then most important thing for any business is return on investment. How much money shareholders make out of the company is what it is all about. Making good quality products, building brands and making customers happy is just a means to that end. And why not? That's called capitalism.

Now, when a company looks for a CEO and other top executives, they look for someone who is going to bring them the maximum return for shareholders. And when they find people they like that, they have to keep them happy and continuously producing more and more bottom line profit.

So, they give them bigger and bigger salaries, higher and higher bonuses and all sorts of other incentives.

Because, the problem is quite simply not enough of these people to go round. And that's why the salary packages and bonuses have got completely out of control.

Now, once government start interfering in that process, all those high earning execs aren't really going to knock themselves out - especially if it's for a relatively menial salary and token bonus. That's human nature.

Greed and power are unfortunately what makes the capitalist world go round. And taking those away will simply kill initiative.

Big rewards

Now, I am not saying I am in favour of big salaries and bonuses. All I am saying is that the realities of life are all about the critical nature of these incentives in terms of getting the business wheels turning.

So, on one hand we consumers pay through the nose for goods and services but on the other more of us end up being employed. If companies start performing badly because of the lack of incentive to those at the top, the first thing boards will do is fire staff. They always do.

So, I reckon the whole idea of governments regulating how much companies can pay their top dogs in salaries and bonuses is just as pointless as imposing legislation that forbids members of parliament and cabinet ministers from having fancy cars, getting free flights, being allowed to have police escorts and generally being treated as though we were their servants and not the other way round.

No-one would be much interested in getting into politics.

Send your comments to Chris.

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Let's not reduce salaries a lot. Lets reduce the bonuses and incentives. Look, government wants to tackle poverty. They should look into the unequal distribution of wealth, look into the different salaries allocated to black and white employees who are on the same level, it's just rediculous.

The main reason governments are implementing this is to show the public, that failure is not to be rewarded. The financial houses played with fire, and got burned. Im currently in the UK, and some of the banks here, after receiving their bail out, went ahead and payed out bonuses anyway, despite the government telling them not to. They then had the cheek to ask for more money. Interest rates and mortgages are going through the roof, yet the fat cats at the top are smiling.

The head of the Royal Bank of Scotland got £2m last year, plus a £2m bonus, plus shares. He is also sitting on a £8m pension. So no matter what happens in this credit crunch, he is still happy, while your average Joe and small businesses suffer.

It is first of all Capitalism that has resulted in this global financial turmoil we are witnessing today,the main factor being the commercialisation of basic social needs such as medical care etc.Which ever way you look at it, capitalism does have it's pros & cons but in RSA it is creating a very "socio-dependant" society in the form of grants. People don't want to work for themselves and its creating this huge gap between poverty and the well-off...

Out of exprience a lot of these big executives are not as good as they make out to be. If you want to give bonuses then you are going to have to really show that this particular individual contributed towards the company. But keep the bonuses within reason some of guys where getting obsurd amounts of money.

Chris, you have a point in saying that interference from government is in conflict with the basis of a capitalist society. however when a crisis of this magnitude arises and government is pushed to intervene in order to stabilise things, then surely BIG questions must be asked of the GOVERNANCE and PERFORMANCE of said CEO's/top execs? call me old-fashioned but let the 'punishment' fit the 'crime' and let those in charge be the ones to have their salaries CUT and bonuses taken away.

Mr Moerdyk let me say in principle I agree with your article but it is dificult to see these gaint incomes justified by so called leaders of utilities whose single greatest achievement is their connections to the ruling party.

The best way should be to restrict the bonusses as a fixed percentage of the Company's actual Net profit. In a similar way banks in SA are forced to maintain a Capital Reserve.(But we all know how well they can cook the books, hey!)

People who do not own capital (most of us) are not capitalists; we sell our time in a capitalist market. Socialism is collective ownership run centrally. No country is completely the one or the other and both systems fail because too few people benefit. Getting caught up in capitalisms vs. socialism is antiquated and plays into greedy hands. The current version of Capitalism is just a complex feudal system because too few people participate in the system (own capital). Ditto for socialism.

I believe you need to pay for human capital, but a better alternative would be to give them LONG term incentives, like say giving shares in business with conditions they are not allowed to sell within say 4y, or that they loose half if they leave too early. This will retain execs and combat short term decision making, to inflate profits during a financial year to obtain performance bonuses, at the expence of future performance.

I agree with Chris, there are however top management people not doing there jobs getting huge salaries eg ESKOM . Let the shoe fit the foot. As Anon said, more bonus for more profit. Get paid for deliviry not promise.

One way of achieving a form of income equality is to link the highest income in a company to the lowest. A worker at R2000/month while -by law- the big boss can take no more than R20.000/month. Think of any other multiplier during an introduction period to narrow the gap between current 24.000/yr to 40.000.000/yr. Performance out of the window?? Don't think so. I have seen many hard and serious working people at the lower salary levels. At the higher levels politicking takes a fair share of time

Benzo: Do not confuse hard work with performance. Anybody can work hard, only a few can perform well while doing so. Top execs that perform well in any company are scarce. Me as a shareholder will pay more for a top exec if he will make my company earn more (or loose less during a recession) than the next guy. I do think that if you are employed to do a job (at any level), your reward must be relevant to performance over time (SAA ring a bell?).