The perversion of the bonus system

Currently in Switzerland, there's a heated debate going about bonus payments in the destitute bank UBS. Basically, people argue whether good performing business segments and bankers should get their bonus granted even though the bank has sustained heavy financial loss in four terms in succession. On the one hand, many people who are positioned rather outside of the bank argue that bankers shouldn't get their bonuses paid with tax-funded provisions by the state - if there's no money, you cannot pay any premium. On the other hand, there are many people rather connected to the sector who point out that indeed, many business segments and bankers performed well in the last terms. However, their good results have been overshadowed by the incredible losses of others. They should be judged and promoted according to their own efforts and success.
Interestingly, a further voice has joined into this debate and is about to weaken the second position if though it's coming straight from within the banks: Especially on the vast non-executive levels, bonuses are decided and paid rather deliberately. The distribution of wage premiums is said to be intransparent and subjective. (see NZZ Online - "Völlig intransparent")
Within this whole debate, many people don't seem to realize the basic problem: That they've got different ideas about the concept of a bonus and that therefore, they are talking at cross-purposes. The first opinion is based on the idea that a bonus is a share of the company's profit. In this sense, beyond the basic compensation contract, a bonus system participates employees to the company's success. In fact, as this concept turns employees partially into shareholders, it's a further consequent step in the concepts of neo-liberalism and the new institutional economics. The second opinion is based on the assumption that a bonus is a reward for especially good work. In this sense, not the company itself but rather each employee's efforts and success are what the focus lies on. The company's success is understood as the sum of every employee's effort. And that's exactly where the fatal mistake of the second concept lies in and the third voice comes in.
A company is a black box. It's a boat where every employee sits in. As Coase had managed to explain in his ingenious essay of 1932, the very reason and origin of a company is the fulfillment of tasks which can barely rated and therefore traded in markets. There are companies because the evaluation and rating of labour on the market costs too much and causes too complex difficult which doesn't pay off in the end. In short, the transaction costs are too high. Isn't that exactly what the criticism about intransparency and deliberateness actually points out? It's not like the human resource management intends to rip off certain employees - of course not, as that would give completely wrong incentives and would rather harm the company's success in the long term. It's simply that they cannot do better.
If people want to secure themselves against the risks of the market, they join a company just like business segments are consolidated in one concern. But if they want to reap the profits and carry the losses of their own efforts, they go independent. There's a reason why there are independent brokers, dealers and fund managers in the financial landscape. Of course, there might be other reasons that force workers in a company - as economy of scales, lack of reputation, etc. However, with today's communication technologies and flexible working conditions, the aspect of risk management has become the biggest incentive to be employed. But if they want their risks covered, they also risk that they must cover up others in their team! That's the idea of teamwork. Sometimes, you're the winner, sometimes the loser. But always, you're sharing it with your teammates. So at that point, the idea of individual rewards and a consolidated business is simply a perversion of everything both the ingenious ideas of modern corporate governance and the understanding of traditional HRM concepts like clan culture has made us understand. Either, employees are the safest group of creditors on the balance sheet of a bank and get their constant interests covered first - as costs - or they are (at least) partially shareholders and profit from their team's success. Isn't one idea of the bonus system to increase shareholder value in the end? What do you think happens if some employees start shirking or gaining bonuses on costs of others? There are thousands of scenarios of moral hazard, adverse selection and transaction costs increases connected to the idea of individual reward.
So what's the conclusion? If a company faces losses, there won't be any money for bonuses. If some employees feel like they've got the short end of the stick, they must split off - maybe that would be a good reason to not abandon the idea of the separate banking system.

Ron Paul even answered me!

Now what do you think about that? Well, his letter seems like a standard reply to an anonymous bunch of commentators. However, the mere fact that he replied and signed in personal suggests that he actually read and took notice of my case on the whole neoliberalism issue. And since I think the story tale is pretty fitting - who knows? Maybe he even thought of stealing it? :-p



Dear Mr. Karakasa:

Thank you for contacting my office with your message of support. It is always encouraging to hear from people who understand the dangers of the federal government's intervention in the financial markets. Thanks in no small part to the overwhelming number of emails and phone calls received, the House of Representatives voted against a bailout bill the first time it came before us. Even though a bailout bill passed on the second try, the groundswell of public opposition has made people on Capitol Hill sit up and take notice. I will continue to bring to the attention of House of Representatives members the importance of returning to sound monetary and fiscal policy.

Sincerely,

Ron Paul



Confirmation # 1245374

I cannot guarantee the integrity of the text of this letter if it was not sent to you directly from my Congressional Email Account: rep.paul@mail.house.gov. If you have any questions about the validity of this message, please email me at: rep.paul@mail.house.gov or call my Washington, DC office at: (202) 225-2831.

Act now before you're completely powerless.

Why did Tyler Durden blow up bank buildings all around the US? Why did Tracer Tong want JC Denton to take down the Helios system in Area 51?
Their intents were the same and as realistic as desperate to answer to the biggest threat our very own societies face these days. The keyword is globalization. Actually, in its current form induced by Western states themselves (Bretton-Woods, GATT, World Bank, ILO, WTO, etc.), further supported by the rapid evolution and cost reduction of transport and communication technologies, it started to erode its very own foundations, state power and our societies, i.e. real nations, and break down the world system as probably less than we know it by now but taught in school and university, imagined in our view of the world. There are two different interpretations and estimation of this process (and not end-state) of globalization: On the one side, the protectionist view sees the many-fold benefits the modern state has granted us, especially security and reallocation systems (taxation and wealth services) that are looked at as even required to develop our society based on a common identity and solidarity. According to this view, I’m considered to feel as Swiss, to feel obliged to support my state and in turn can count on its own support. Enterprises are just another part of our society, assigned to produce and maintain material wealth. In this view, globalization is first and foremost a threat that risks to undermine the state, deprive it of its securing and wealth-giving power, to break up society and leave us on our own. On the other side, the libertarian view considers this as an individual empowerment. We get freed from national boundaries, able to unfold all our potential in a new, bigger world-wide sphere. National society might get destroyed but emerge in a new world-wide society, or at least can join social groups that share just our own cosmopolitan views.
The power of the states gets substituted by the power of markets. Competition is the new credo which everything will be subordinated to. The protectionist view considers this as a risk, the libertarian one as a chance.
It shall be here where I set in with my personal argument which I consider note-worthy as I myself once was a zealous supporter of the opposite. I shall argue here in favour of the protectionist view as the libertarian one as revealed itself to me as credulous and careless as it can be. How much I ridiculed the ostensibly short-minded ideas of local politicians, was dreaming of national borders get torn down, travelling everywhere I wanted and ally with those whose opinions I shared emerging in own big world. But, this dream has started now to somewhat change in a nightmare. Liberty doesn’t lead to equality and solidarity but to huge gaps. The markets and its competition has increased the gaps between nations, between social strata, between people, turned everyone against everyone, dividing strictly into winners and losers and increasing that separation more and more. Enterprises wander off to low-wage countries, first cut jobs of low-qualification labour. The libertarian argument at that point was still noble: In the process of a world-wide reallocation we can’t be helped to transfer some of our wealth to still developing countries, we all would just have to increase our qualifications to focus on labour those countries can’t compete with. But information diffuses faster than people and the very motor of globalization are inequalities and so enterprises soon started to lay off high-qualification jobs to such countries. Interestingly, the new economic opportunities in those countries, that generally didn’t provide any huge social wealth systems anyway, didn’t lead to a general rise in wealth but to a increasing gap just as in our home countries. Thus, globalization might have decreased the gap in wealth between countries, but increased the gap between social strata in them. Just as the state kept losing power, actually was forced to destroy itself in order to survive, forces to level out those gaps vanished. The rich are getting richer and fewer, the poor are getting poorer more. At this point, the libertarian view calls forth to new governmental structures on world-wide level, the notorious UNO, WTO and so on. But looking at how powerless those institutions actually are makes one realize that all they were doing so far was supporting the process of globalization. They never were designed for reallocation and they never will be able to take over control.
Who’s to blame? The big corporations? The managers? The rich who take advantage of the situation? Oh no, a closer look reveals that those actors are as much slaves to the new system as the others are: If they would try to oppose to the system, they just would lose the upper hand and end up like the rest. They don’t have any control. Who has it? The system itself. The transport routes, the communication channels, the markets! It’s there where the power lies! But nobody owns markets. Thus in the end, nobody has power. Further on, markets aren’t reasonable, but rational. What might lay ahead, out of the short-term planning horizon simply cannot be taken in consideration. In order to equalize and pacify the world again, you have to sacrifice exactly what brought us so far in the last decades. And it’s obvious where to start: To take down the modern financial markets that have become so efficient that they make up ten times as much traffic than merchandise trade these days, that are able to reallocate funds at the other side of the world just as one state tries on a last reallocation measure. It’s them that have made us all slaves to nothing.
But do we really have to blow up banks and stock markets as the central nodes of this financial network? To take down internet hotspots to tie up communication in general? Protectionists point out that the very rules these markets and systems are based on aren’t protected by super-national institutions but first and foremost by the states. So will markets undermine their own foundation by disempowering states? But personally, I feel that this isn’t the right question. The question is what will the world look like at that point of time. It’s going to be a drenched out wasteland housing some pompous castles inhabited by the rich that are wasting the biggest part of their wealth defending themselves against ongoing waves of assaulting poor people. Nobody will neither have the resources nor enough reason to take care of anything that goes beyond its personal survival. Environment will have got a completely new meaning for example. This will be hell on earth.
Actually, the recipes of Tyler Durden and Tracer Tong are perfectly reflecting the difficult and demanding globalization discussions among current philosophers like Habermas and Beck and thus I do not only recommend to watch the movie Fight Club and especially play the two games Deus Ex and Deus Ex: Invisible War that somewhat seem like a perfect illustration of this difficult subject but also read a bit from those philosophers just before you go out to blow up things for the sake of the world.