Bonus

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Bonus
ˈbəʊnəs (n.)
A time-honoured incentive plan for agents, by agents.

“Ownership” and “service”

Financial services firms have long struggled with the distinction between ownership and service. A firm’s owner takes her reward from the investment of capital — cash that the firm uses to acquire kit, rent premises, pay suppliers and hire staff, all in the collective enterprise of selling goods and services.

As long as firm’s return from doing that exceeds that capital outlay, the firm is making money and its shareholders will see a profit — simplistically, that net return, divided by the relative size of their stake.

Thus, to earn a return, shareholders do not have to do anything beyond ponying up money and not asking for it back. They can’t ask for it back, indeed: the transaction by which they invested capital was a sale and purchase: money paid in return for a share. If she wants out, the company is not obliged to offer her anything, let alone the sum she once invested. She may find someone to whom she can sell her shares, but she must accept the price they are prepared to pay.

To be sure, a shareholder may wish to oversee how her capital is deployed, but this is to look after her own interests and not to work for the company per se.

That money she provides can be used to buy servants. These are people who will supply their labour, time and effort. In the modern argot, we call these people “employees”, though an important nuance — namely, servitude — is lost in our formulation.

A servant is paid for what she does. She is the inverse of an equity holder — she contributes no money — rather, she costs it — so must do something to earn her keep.

In sum: a shareholder contributes not labour, time or effort but money and is rewarded with profit. A servant contributes labour, time and effort, in order to create profit, and is rewarded with money.

On measuring value

In a perfect world — for a landed capitalist, at any rate — servants would be paid only for what they contributed. This is easier to measure for some workers than others: for salespeople it is straightforward. For back-office staff, less so. For legal officers more or less impossible.

In any case, the civilising forces of the labour movement — quiet at the back there — have long since intervened to ensure that all servants are paid a pre-agreed basic wage for their time at work, however productive they are.

Now econometricians tell us a fixed wage for showing up is no great incentive for a servant to strive for excellence. The history of financial services employment practice has been, therefore, the effort to engineer suitable alignments given the confines of employment regulation. It has been also to undo the virtuous social work done on behalf of the proletariat by the unions. Financial services professionals, you see, aren’t proletarian, don’t need to be paid a lot to show up as long as you pay them handsomely for their excellent performance.

The cost of capital being what it is, the lower one can make that commitment cost base, the better.

All of these desired outcomes arrive at the same conclusion: keep basic pay as low as possible, and reward people with a big fat annual bonus. Financial services bonuses can be three, four, five, or ten times the size of the basic pay.

This is excellent news for Randian raw-meat eating cannibal types, but has its downsides too.

You can always offer staff the carrot of annual pay rises, but this has a ratchet effect: a servant whose work quality declines over time cannot really have her pay reduced — employment regulation makes this procedurally difficult. So payrises tend to be anaemic, hedged about by concern for the firm’s cost base should the business environment deteriorate.

On the other hand, should the business environment improve good staff disaffected by unimpressive pay rises tend to be biddable by other firms prepared to pay more.

The alternative is “discretionary” compensation. For salespeople,

See also

• Donut
• Compensation
• Reduction in force