Recent Articles

Sunday, 3 February 2013

Liebrary: Do high pay and bonuses encourage high performance and excellence? A US Federal Reserve study says high reward actually results in worse performance!

Now here is something all the fat cats and their apologists really don't want us to see: scientific evidence that paying them fat salaries, perks and bonuses actually makes them worse at what they do not better. The evidence is provided not by some left wing think-tank, but from research done by top US universities funded by the US government.

Fat cats from executives to politicians claim that paying them loads is done for the good for all of us. Paying them more, they claim, would attract higher calibre people. Presumably because they find themselves and their colleagues inadequate (can't argue with that). To say anything to the contrary, they assert, is just envy. So we should just shut ourselves up and put their pay up.


You would have thought the evidence of the Credit Crisis, in which highly paid bankers crashed the World economy, together with the ongoing litany of banks ripping off their clients (PPI; Interest Rate Swaps; LIBOR rigging...) has proved beyond reasonable doubt that by paying vast amounts of money you simply get people who are blinded by money and will recklessly and without compunction pursue money for the sake of getting money.
Studies by high powered economists at top US universities (MIT; University of Chicago; Carnegie Mellon) funded by the US Federal Reserve (hardly a font of left wing propaganda) found that while increasing rewards increase performance for physical tasks, high rewards actually result in poorer performance for cognitive, intellectual work. Now you may say that describing the work of our MPs and bankers as 'intellectual' is stretching it a bit. But we can say with some certainty that what they do doesn't fall into the "physical" category.

The lesson for us: when MPs, bankers and businessmen claim we must let them take more money to incentivise themselves, don't believe them. They want us to agree to them taking more money simply because they want to take more money. So if you want to shoot down their arguments you should watch, and retweet, this animated presentation from the RSA (Royal Society for the encouragement of Arts, Manufactures and Commerce)



Apologists for the excessively paid may say that this experiment can't be extrapolated from the American students and the South Indian villagers used as this study's guinea pigs to bankers and politicians. But don't let them forget: another far bigger real life experiment was done over recent decades involving bankers, regulators and politicians. All these highly paid individuals stunningly failed that test. That test ended in the 2008 Credit Crisis and the crash of the World economy.

Pity the domestic cat, Felix Catus. Politicians, bankers and their ilk are only called 'fat cats' because cat rhymes with fat. A more appropriate animal comparator would be the tapeworm, though rhyming with that is much tougher (suggestions to tapeworm@rippedoffbritons.com). Executives, particularly in the banking sector, claim that they are forced to take £millions to attract and reward the best staff for the good of Britain and all us Britons. They point to the soaring banking sector revenues to justify their soaring bonuses. But like the tapeworm, they grow by sucking nourishment out of and impoverishing their host (that would be us citizens and businesses). Soaring banking revenues and profits are driven by rip-offs like: 

Support for the tapeworms is provided by HMRC with lax tax, the FSA with poor regulation, and politicians who enable all the above with their cheers and obfuscations.

One example of the support the FSA provides is the ruling on compensation for the Interest Rate Swaps scam, that pushed many businesses into ruinous losses and bankruptcy. Banks hope the FSA will put a cap on the compensation they have to pay. And that they will only have to repay the money they misappropriated, rather than have to return the business to the healthy state it would have been in had the misappropriation had not happened. 

To understand the implications of this, consider a vandal cutting your brake cable causing your car to crash resulting in injury to you and others and destruction of property. The banks are hopeful that the FSA will only require them to pay for a new brake cable, as that is what they cut. The banks are hopeful they won't have to pay for the resulting injury and destruction. 

One collateral result is all the other tapeworm in other industries and professions, seeing the bankers get away with their bonuses yet again, are encouraged to suck even harder themselves.

Measured by GDP in the decade before the banking crash of 2008 Britain was keeping up with France and Germany. But measuring GDP is like measuring the weight of a child with a tapeworm. The child gets heavier as the tapeworm inside the child grows, but with no benefit to the child. This only becomes evident when the tapeworm has a crisis, as it did in 2007.

History will look back at our times and view the excessively paid executives as the great frauds of our time: 20th century witch doctors profiting from phoney promises of wealth (that they fail to provide) if we pay them and empty threats of calamity (that happen in any case) if we don't. The best the national leaders, who allow and encourage the tapeworms to get filthy rich at our expense, can hope for is that history will forget them.

(RSA animation suggested to Ripped-off Britons by Richard McCarthy @Barsacq)

2 comments:

  1. Good post.
    Last year I saw an op-ed with some anecdotal evidence along the same lines (sadly I haven't been able to find it). This compared the package enjoyed by one of Norway's top CEOs (might well have been Statoil) with those of some UK or US high-flyers. And guess what, the Norwegian company's performance far outstripped the others, though their CEO's package was tiny compared to his US / UK counterparts in the same industrial sector. Of course there are cultural issues to do with expectations; and we won't change our greed culture overnight.

    ReplyDelete
  2. Throw them all in jail. NO BONUSES for sticking it to the poor, after misleading them with subprime mortgages. Austerity is the wrong idea. Unless it's austerity for bankers. Bonuses for the rest of us. They need money for "talent" to screw up the world? No thanks. Higher wages for the masses, higher taxes for the rich. Under FDR taxes were 100% over a certain income. Now many US corporations, which are multinational so not even U.S. get tax refunds. That's obscene. When will governments wake up? They won't as long as they're supported by bankers.

    ReplyDelete