Friday, 6 February 2009

Bonuses for RBS staff

Oddly enough, given Robert Peston's latest post, I met some people from RBS today. They seemed to have a decent understanding of, and commitment to, their job. I imagine they were - as Peston suggests - completely uninvolved in any of the high-risk decisions that put the bank's capital at risk.

Having said that, they have no doubt benefited along with the rest of the staff when the bank was profitable for the last few years.

But no matter - the proper economic reason for a bonus is not primarily to reward past performance but to incentivise future performance. The reason it's typically calculated on past performance is to reinforce the notion (from game theory) that sequential games are linked; to create an ongoing narrative of one event flowing from another, credibly tying together present-self and future-self so that people invest today's time and effort for tomorrow's reward. This is how the interests of employees and owners are aligned.

If this is made explicit, there is no reason why the new shareholders (us) of RBS should object to the staff being offered a bonus. It is in our own interest for them to do well, because we do well out of them.

And the demand for banking staff is not so high that there are huge opportunities for good people to walk out and take.

So it should certainly be possible to design a suitable bonus structure which addresses the past, incentivises future performance, satisfies staff motivation and taxpayer concern or resentment.

Something like this: a share option structure which gains value only when RBS shares recover to a certain point and the state's stake is reduced below a certain level (maybe 30%). The number of options awarded to be based on past performance; the future value of each will be derived from RBS's success in giving the taxpayer a return on our investment.

Make this case; give the taxpayer credit for being mature enough to understand this argument; and there should really be no problem with a scheme like this. Assuming journalists and bloggers don't whip up too many self-fulfilling predictions of outrage.

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