A typically indecisive Will Hutton article in The Observer (29.1.12) was headed ‘Hester’s pay discredits bonus culture’. Did Will Hutton think, despite the works of Bob Diamond, Fred the Shred and the rest, that the bonus culture still had credit up to the time when Stephen Hester was awarded his relatively modest bonus of around £1m. Of course, Will labours under the considerable disability of being a neoclassical economist. Which unfortunate affliction led him, in the article, to assert that ‘It is true that well designed and proportional incentives work’. He offers no evidence. It is simply a bone deep belief, no doubt held in his mind since school days doing A level economics.
Much is understood about human motivation, intrinsic and extrinsic, which won’t be repeated here. But economists only deal in money and it is well understood how money incentives crowd out intrinsic motivation. In the case of the bonus culture, incentives are specifically aimed at doing just that, so that executives are converted into shareholders, thus aligning themselves with shareholder interests. That is the sole purpose of the bonus bribe: to destroy higher level, longer term motivations for the short term benefit of shareholders.
Stephen Hester’s case is interesting, not least since he rejected the bonus payment offered. If ‘the market’ was the measure of success, as economists would have it, then Mr Hester has so far failed: the RBS share value has more or less halved during his tenure. However, his job was specifically not to maximise shareholder value, but to reorient RBS away from the casino banking activity and to provide a traditional High St banking function efficiently and effectively. In doing so he is obviously turning RBS away from highly profitable if risky business in order to focus on the traditional banking virtues. The dubious mechanism for assessing bonus worth, the remuneration committee of vested interests, assessed that Mr Hester had made good progress in the specified direction.
But the question remains as to why Mr Hester, in the end, turned down his bonus. It might have been that he finds substantial satisfaction working for RBS at the level he is, where he can achieve substantial benefits for the great British public at the same time becoming, as Adam Smith put it, a proper object of respect, deserving and obtaining credit and rank among equals, at the same time receiving a basic salary which even economists would have to agree as competitive. It might have been that.
Back in 1997, Peter Drucker told Forbes magazine that top salaries could be no more than twenty times that of the average hourly paid worker ‘without injury to company morale ….Few top executives can even imagine the hatred, contempt, and even fury that has been created – not primarily among blue-collar workers who never had an exalted opinion of the ‘bosses’ – but among their middle management and professional people.’
Up to Mr Hester’s case, the lid had been kept on that ‘hatred, contempt and even fury’. But with RBS being owned by the taxpayer, and the bonus bribe offered to someone already being paid a basic salary around 4 times Drucker’s limit, the lid was in danger of being blown off. The government did nothing; Vince Cable offered only weasel words. The only constraint seems to be the sure knowledge that salary and bonus excesses don’t earn respect and credit, but rather hatred, contempt and fury. Open expression of such violent feelings might in the end have some impact. Stephen Hester’s rejection of his bonus might be some indication. Even a government that exhibits so little understanding of the real world as this coalition, might take some note.