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January 27, 2011

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Marcin

Would you choose a job with 2m pay, but a chance of a fine? What if the fine goes up?

With the bonus system, workers know what their guaranteed minimum earning is.

Nigel

Same reason sales commission isn't paid in advance and then clawed back - the performance has to generate the revenue before there's anything extra to give out.

Plus there's not the sharp distinction between bonus and fine that you make out. People often have a level of bonus expectation based on history.

chris

@ Marcin - the maximum fine can be set contractually, thus setting a minimum wage.
@ Nigel - I can believe that some firms are credit-constrained, but saurely not banks; the essence of banking is that they do borrow big and cheap.

CharlieMcMenamin

May I propose a small amendment to your third to last sentence? Perhaps, if you want to illustrate (via your rhetorical ending question) that there are grounds for believing that banks are run in the interests of their (higher) staff, not shareholders, you might have written:

"Instead of paying a man £1m a year plus a £1m bonus for meeting certain criteria, he could be paid £100,000 a year, with but with £50,000 withheld if he fails to meet those criteria."

SimonB

Dan Pink's work seems relevant to this. He suggests that you cannot get more out of someone by simply paying more, the relationship cannot be linear. There's a great little summary here: http://www.youtube.com/watch?v=u6XAPnuFjJc .

Of course, we are told there's a market rate for these top jobs. Funnily when it comes to banking the markets seem to go into reverse, making them cost more. It's almost as though there was a chummy cartel operating.

Of course, question 1 must be how banks make such profits when they are supposedly competing in an open market. Could someone create a bank that undercut them while remaining viable but with slightly lower profits? Why isn't there room for such an entity?

BG

It feels like the fines would still be really hard to implement though. This forgets one of the 2 main reasons why there are bonuses: the bonus reflects both general firm performance (by determining the total amount allocated) and individual performance (through the percentage a person gets). Given that a firm can't really know what it will earn in advance, it lets it slash costs in a bad situation. In this situation, if you had fines, you'd need to "fine" everybody, which people would most likely view as very unfair.

Which leaves the slightly puzzling - and I'd imagine too some extent true - that banks might indeed ben run to some extent to the benefit of employees (and more than just a handful of executives)...

Phil Ruse

So presumably you'd have to fine the person who does "well" in order to differentiate them from the person who does "exceptionally"?

James Delingtwat

Employers look at pay in terms of the total package, including variable pay such as bonuses. And so do most employees. So not getting a no bonus or getting a lower than expected/usual/peers one will feel just like a fine.

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