How damaging is our bonus culture?

  By Peter Day Presenter, In Business, Radio 4

Is it possible to call time on the bonus culture?

Bonuses were supposed to reward exceptional performance, but as the culture has spread from the City through big business to the public sector, how much damage do they cause?

It seems obviously most "fair" to a lot of people if everyone shares equally in the world's wealth. It is the sort of idea that animated those forerunners of the Occupy movement, the Diggers encamped in 1649 on St George's Hill in Weybridge in Surrey.
A product of the English Revolution, they were outraged by imbalances of wealth in a still land-based agricultural society. They sought justice by occupying and trying to cultivate the land they had squatted on.
In a modern industrial society, fairness is more complicated. Some people make more, invent more, score more goals, give more pleasure, enable more people to be employed than others.
Isn't it fair that their creativity, effort, leadership, hard work etc, be rewarded? That is certainly one of the tenets of capitalism.

In the 19th century, Bethlehem Steel's pig-iron shovellers were offered bonuses for speedier work

And it is - of course - where bonuses come in. They started off, in business anyway, as a recognition for success in the previous year: a capon at Christmas, an extra week's pay. A heart-warming token gesture.
The first management guru, the American Frederick Winslow Taylor, was a time-and-motion man.
He used his stopwatch to clock the performance of the pig-iron shovellers at Bethlehem Steel Corp in Pennsylvania at the very end of the 19th century.
Taylor told his company clients that production went better if the workers were motivated: bonuses for more shovelling, or more chickens eviscerated. Piece-work, in other words.
It seems fair, if not particularly generous to those people unable to work at top speed.
Meanwhile partnerships, in the law, accountancy, banks and other financial institutions, were devised around a remuneration system you might see as institutionalised bonuses.
'Ratchet effect'
Partnership divided up the profits of the business between partners at the end of the financial year. If there were losses, they were divided up, too. Liability was not limited up to the 19th century.
And much of this fairly benign system of reward stayed in place in Britain until the 1980s.
Then several things happened. First the financial markets in the City of London were changed out of all recognition by the great deregulation (known as Big Bang because it happened all at once).

GE's Jack Welch helped spread the bonus culture across the Anglo-Saxon business world

For the first time outsiders such as the great international investment banks were permitted to buy London Stock Exchange brokers and jobbers, and they did, leading to an orgy of wealth changing hands in the 1980s.
The new employees in the City were no longer partners, they were salary men and women.
But the sharing out of partnership profits was swiftly replicated by a new distribution of bonuses to top people and the so-called "marzipan layer" underneath the top.
It was like a new form of socialism right at the heart of capitalism. The workers shared directly in the profits generated by their labours.
But the bonus world grew at ferocious speed. Bonus promises were the way people were hired and motivated to take daily risks with other people's money.
The ratchet effect began to work its magic as comparisons were made and overtopped by new offers. Bonuses became multiples of basic pay. Bonuses were guaranteed and no longer necessarily rewards for performance. Bankers could become rich, fast.
Meanwhile the cult of shareholder value was making itself felt in Britain and America. It all seems to have started with an extraordinarily influential article in the rarefied pages of the Journal of Financial Economics in 1976.
Race to the top
This argued that top people's compensation based on shares in the corporation - for example, granting options as bonuses - was the most effective way to align the interests of management with that of shareholders.
It was taken up in a big way by Jack Welch, the chairman of General Electric, and spread quickly across corporate thinking in the Anglo-Saxon business world.

Few company remuneration committees want their chief executive to earn less than competitors

Share options, stakes, pensions promises and straight bonuses rapidly became a norm in big business. "Everybody" was doing it, so everybody had to do it.
Remuneration became a talking point, a badge of achievement, a scorecard of success.
No company's remuneration committee would want its chief executive to be anywhere but in the top quartile of pay. Directors sat on each other's remuneration committees.
At the same time, shareholder value was a difficult thing to measure, and certainly to explain. While the going was good, shareholders asked few questions. Top people were hired on iron-clad contracts that gave them huge rewards for early dismissal. Failure paid.
The bonus world took its grip on bosses, and then on managers. Bonuses cascaded through the middle layers of organisations. Fair enough, people said: a motivation for good work. It became a kind of norm, not exceptional.
The people who missed out were the people on the production line, the very people originally motivated by bonus thinking.
And then the bonus culture spread into public services, perhaps influenced by the way top managers were for the first time moving from private to public enterprise, setting a trail of comparators on remuneration practice.
Once you have created a culture which gives so much tangible reward to so many people in power, it is difficult to limit it, control it, or reduce its influence.
Whether or not it actually makes most top people work harder, or better, is not known at this time. But bankers are certainly rewarded for taking big risks with - as I say - other people's money.
And when they get into trouble, the other people turn out to be we taxpayers.
Voluntary restraint?
We have come a long way from arguing about "fairness". It still seems fair to reward good work, but only if it is demonstrably "good".
And it cannot be healthy for any organisation or society when the gap between the lowest paid and the most rewarded widens as extremely as it has done in Britain and the USA in recent years.
The Treasury is currently considering what to do about boardroom pay. But in a free society it is probably easier to order an inquiry than it is to come to a conclusion about it.

Find out more

In Business was on BBC Radio 4 on Thursday 8 December at 20:30 GMT and Sunday 11 December at 21:30 GMT.

The most effective way to tackle bulging bonuses would be to usher in - somehow - an era of voluntary restraint, inducing an aura of shame to conspicuous rewards.

I had naively thought this might happen as result of the credit crunch, but it has not happened yet. But then, the crisis is also not over yet.
Nine years ago I met a man called David Bussau, a man with a memorable phrase that still nags in the mind.
A religious man brought up in a New Zealand orphanage, he then prospered in Australia by starting a group of construction companies.
He became a millionaire at an early age, but remained at the beck and call of his wealthy clients. He started thinking and decided to change his life.
He and his family went off volunteering, a move which eventually saw him co-founding what became Opportunity International, the worldwide micro-lending organisation.
It was the phrase he used to describe his wealth that struck me then, and still does. "We had sufficient," he said, in an interview we did at the World Entrepreneur of the Year Awards in Monte Carlo.
This concept of "sufficient" is a potent one. Not many people think like that in the bonus world.

In Business is on BBC Radio 4 on Thursday 8 December at 20:30 GMT and Sunday 11 December at 21:30 GMT. Listen via the Radio 4 website, or download the programme podcast.

With Courtesy of BBC