Well, I can’t help a few observations on the current debate about salary capping. The word out on the newswire is that the big executive salaries and bonuses are coming back and there is some conjecture about whether it signifies the western economies are returning to the bad habits which brought the house of cards tumbling down. Particularly that, as much as no one wants to believe it, there are still many people suffering from the past years conundrums and many economies aren’t really recovering as quickly as everyone is pretending.
I heard an interesting interview with some bloke who had walked away from the arguably excessive salaries typical of the pre-economic crash economy.
Of course the capitalists argue that bonuses are a necessary component to drive risk and creativity vital to economic growth in a free market. The free market fundamentalists will even say the that the cost of the past 2 years is negligible compared to the entropy of government interference. They’ll point to failures of communism and certain Southern American experiments. Of course it hardly relevant and not really that helpful if you are one of the unlucky ones who no longer owns their home or is suffering the weight of lost superannuation or savings.
The reactionaries argue that the level of irresponsibility inherent in the behaviour which caused the mess demands price controls. The response of these heavily bonused play people wasn’t the downside risk of creative aspiration and innovation, it was just plain GREED. Accordingly, you need to stop providing the cheese which makes these mice push the financial levers of destitution.
In my experience, bonus incentives are really interesting beasts. No doubt, they helped me pay off my mortgage, but didn’t make me wealthy. They drove me to find new and better ways to run the business and increase the profits which we did – substantially. It was all honorable and would make the capitalists proud – some years ago.
But I heard an interesting interview with some chap who had made some bucks before he walked guiltily away from a major financial market job, but not before he’d pocketed a small fortune. He suggested that the problem was that typically bonuses carry a unilateral risk – you can only win and you can’t lose. When there is only an upside, you’ve got nothing to lose and so who cares - got an idea let’s try it. The worst that can happen is that the shareholders cop it, but I’m OK – I’ll still get my base salary so at least I can pay the rent. One way risk apparently is the formula for the it’ll be OK derivative. The it sounds good so let’s try it without really thinking it through solution which helped to bring some of the great financial powerhouses.
I have a feeling that he has a point but it’s not quite that simple. Sure if you can only gain if you try an idea and you reckon the likelihood of success is good – you’ll give it a go if you think it’s your best idea. That sounds pretty like the human mind to me. But what if you are SO SURE that it’s a winner that you personally risk a bit too much. For example, what if you think it’s really likely that you have a great idea and you expect that you sure to get a bonus so you go and buy a new house at inflated prices, based on your expected bonus. And what do if it wasn’t such a good idea and doesn’t quite deliver the bonus you thought it would. Maybe you’ll try and pretend everything will turn out OK. But maybe, just maybe, you might be a bit naughty and rather than respond rationally (i.e. stop the stupid behaviour) , your in so deep that you try something which maybe you shouldn’t, but its OK because hopefully no one will find out. Anyway, everyone’s doing it….
There is of course a downside when everyone gets overconfident. It’s like that decision you make after a bottle of wine which you think twice about when your soothing the headache the next morning. It sounded good in the alcoholic euphoria but in the sober light of day – it was a crap idea.
I have a feeling that a lot of people realised the folly of their ways, entranced by the euphoria of the promise of everlasting growth, but then they woke up and realised the fix they were in. The downside risk emerged over time for those high flying executives who had totally misread their personal circumstances. Over confident they had accumulated a lot of debt to pay for a lot of toys they couldn’t really afford. When they realised the truth of their predicament, their only option was to keep playing the game, hoping that a miracle would turn water into wine and save them from the coming disaster. deep down they new the miracle would never come. But oh xxxx – what could they do…….
There is a downside risk if you lose touch with reality (and not many people didn’t). If you start to believe those bonuses are inevitable, you fall into the downside risk trap – first you start to believe the fantasy (everlasting growth), then you have to believe it. When these high flyers find find themselves in trouble, we just might need the government to protect us from them.
