Thursday, 26 February 2009

Fred Goodwin's pension

Robert Peston has another example of an economic decision which looks odd from a simplistic rational point of view, but makes perfect sense when perceptions and expectations are taken into account.

Firing someone often makes an important statement about the direction of a company. But (as most of us would certainly wish) it's difficult for a company to fire people at will. Thus, companies usually have to pay off the individual - whether with a pension or a lump sum.

For a company the size of RBS, a £16 million payoff (or whichever part of this was actually discretionary) is easily worth the improvement in public image that comes with such a major break. Of course the payoff itself - since it inevitably has to be made public - has a perception impact, but that's probably much smaller than the damage of keeping the same person in charge.

Would you argue that Goodwin's actions were egregious enough to justify sacking without compensation? Most people have made judgment calls at work which caused substantial losses, though they are rarely as visible and hardly ever as expensive as Goodwin's. We tend not to run the counterfactuals over most of our work to see what opportunities we have missed or mistakes we've made.

Perhaps in future, CEOs will be more likely to have "at-will" style contracts where they waive their rights to compensation in advance. But it's a little pointless to argue that we should have had them in place ten years ago.

4 comments:

sophocles said...

To say that companies do not or may not fire at will is wrong. Both are true and it happens at the lower levels, all the time.

It happened to me twice in eight years without compensation. Each time, five years of service was been wiped off.

Employees cannot appeal against the findings of fact by an Employment Tribunal. Both times it happened, the evidence was recorded.

Yet have you heard any objection from the Unions? Why not? Have they been promised future knighthoods and lordships to keep off the subject by the Government?

None of these events that we are witnessing happened in isolation. The Government wants to distance itself and the bankers do not want to admit publicly that they were practically licenced to steal or gamble to their hearts content.

The regulators and the auditors also were in on the act as well as the press.

I am sure you have read "Animal Farm". They believed that they had actually achieved the plot.

sophocles said...

To say that companies do not or may not fire at will is wrong. Both are true and it happens at the lower levels, all the time.

It happened to me twice in eight years without compensation. Each time, five years of service was been wiped off.

Employees cannot appeal against the findings of fact by an Employment Tribunal. Both times it happened, the evidence was recorded.

Yet have you heard any objection from the Unions? Why not? Have they been promised future knighthoods and lordships to keep off the subject by the Government?

None of these events that we are witnessing happened in isolation. The Government wants to distance itself and the bankers do not want to admit publicly that they were practically licenced to steal or gamble to their hearts content.

The regulators and the auditors also were in on the act as well as the press.

I am sure you have read "Animal Farm". They believed that they had actually achieved the plot.

Matthew Cain said...

But Goodwin did nothing wrong in that sense. RBS wasn't fraudulent; its business model was similar to others; it was within the regulatory regime the government setup.

Yes, the pension payment is payment for failure - but Goodwin is a small part of a larger systemic failure: http://blog.matthewcain.co.uk/government-bullying-fred-the-shred/

Anonymous said...

Of course he should get his full pension if it was agreed he would in his contract. If his strategy had continued to work he would probably have got far more, not to mention additional salary and bonuses. However, if it is found that he was negligent, he could be sued and be liable for any compensation or fines. But that is a separate matter.