Excerpts:
"...Take two bankers. The first is conservative. He produces one annual dollar of sound returns, with no risk of blow-up. The second looks no less conservative, but makes $2 by making complicated transactions that make a steady income, but are bound to blow up on occasion, losing everything made and more. So while the first banker might end up out of business, under competitive strains, the second is going to do a lot better for himself. Why? Because banking is not about true risks but perceived volatility of returns: you earn a stream of steady bonuses for seven or eight years, then when the losses take place, you are not asked to disburse anything."
"...If capitalism is about incentives, it should be about true incentives, those resistant to blow-ups. And there should be disincentives to remove the asymmetry of the free option. Entrepreneurs are rewarded for their gains; they are also penalised for their losses. Now, by comparison, consider that Robert Rubin, the former US Treasury secretary, earned close to $115m (€90m, £80m) from Citigroup for taking risks that we are paying for. So far no attempt has been made to claw it back from him – only UBS, the Swiss bank, has managed to reclaim some past bonuses from its former executives."
There is something rather obscene when a CEO takes a bonus in a bad year - contracts shmontracts. You make money you earn the bonus, you lose it don't take one. That's fair capitalism.
The earlier paragraph by Taleb reminds me of what's going on in sports. After one great season and not much else, an athlete will probably sign a huge contract. They can jump from $500 000 to $2 million just like that - snap. Of course, if, say, an offensive player's production slips the following year, he's not expected to give back his money. I have no idea why sports doesn't have more (or move to) a more prudent mixed "incentive" and guarantee based contract. For instance, "You reach such and such plateau you get X dollars. You don't you get Y" on top of your base. I know sports contracts, which have become complex endeavors, do have this but I'm suggesting something else - albeit awkwardly. If a player hits .234 one year, he shouldn't be bumped up in salary because his union or the "market" says so when compared to other comparable player. Often we hear agents say, "pay market value" but who's determining the actual value?
Moreover, the current financial structure is set up in a way even mediocre players can earn a remarkable living. Mind you, many mediocre people earn a lot of money in life too. The system is out of whack because too many players are not worth any where near the rich contracts they managed to get.
Nonetheless, there's something strange going on when an athlete's salary has skyrocketed to the point where some of them have become small business empires onto themselves while the average salary in North America (possibly Europe) has either been stagnant or modest in its gains. In other words, what happened in sports that allowed it to explode relative to the rest of the economy?
He closes:
"Finally, I was involved in trading for 21 years and I can testify that traders consciously play the free option game. On the other hand, I worked (in my other job as risk adviser) with various military organisations and people watching over our safety. We trust military and homeland security people with our lives, yet they do not get a bonus. They get promotions, the honour of a job well done and the disincentive of shame if they fail. Roman soldiers signed a sacramentum accepting punishment in the event of failure. This is prompting me to call for the nationalisation of the utility part of banking as the only solution in which society does not grant individuals free options to look after its risks."
No incentive without disincentive. And never trust with your money anyone making a potential bonus."
I'm not sure I agree with his call to nationalize the utility part of banking but I can be convinced for when all is said and done, Taleb gets to the heart of the problem. However, I've observed a similar phenomena in many sectors and it doesn't necessarily have to involve money. In a different vain, I wonder if a meritocracy even exists anymore.
It used to be that we were loyal to our employer and he to us. Nowadays, not unlike Airmiles, bonuses are a way to buy loyalty. After all if I take a look at my daughters carreers, why shoulg they feel loyalty to their employers? One has been "downsized" twice in three years, the other one has been "sold" twice with her whole department and that department is now depending on the renewal of it's contract with a third party...not known for it's loyalty to anything but it's profits.
ReplyDeleteThus bonuses are about the only means left to anchor someone anywhere, however they should be earned not automatic wether the company has gone bankrupt or not and never at taxpayers' expense.
I'm gonna name names here so if people don't like it they can shove it. We should speak out.
ReplyDeleteI know exactly where your daughters are coming from. I've never been personally "downsized" but I've seen the financial inst. I worked for treat its employees with shocking disrespect.
The Royal Bank, during my time there, had a high turn over rate because they never liked paying their workers too much money. They say they're about "client services" but they're not. Banker/client relationships today are meaningless. Bankers don't stay in branch positions for too long for a myriad of reasons - the bank simply doesn't value it.
Think Pittsburgh Steelers. Is there a more stable organization in sports in the world? Treat your staff well and watch you thrive.
Of course, the bank does make huge profits so customer service is the least of their concerns in my opinion. When push comes to shove workers are expendable and clients are ignored.
I can't tell you how many times the bank played politics with good, honest workers who believed in Royal. For the rhetoric Royal spewed, they come up short in my opinion.
A-holes of mediocre and questionable character always got promoted. People who, once in power, were more concerned in showing who's boss by picking on workers.
Forgive the scatterness. I'm battling a massive headache but I wanted to impart my experience. I probably made some eye-raising comments but in general this is how it was for me.
That's why I never believed a word these people said in the boardroom. How could I take seriously a recently promoted person I knew was a bum?