10 years ago, I received a call from a ex-classmate who told me that he was going to backpack around the world for 6 months. The reason being he received 12 months bonus for the previous year from his company which was in the semi-con business but the cyclical business had turned down and he decided to quit before the company retrenched him. The company had record profits and everyone was rewarded with huge bonuses. He did work hard but the bonus was on top of the OT pay he received for that year. I was happy for my friend but wondered what he did right other than to join the right company at the right time - not that he had extraordinary foresight that the sector/company would have such a blockbuster year -it was all a total surprise to him.
Recently there has been a lot of talk about the bonus received by certain people. AIG which blew up and took more than US$100B of taxpayers' money to stay alive caused an outrage when it was revealed that it was paying executives including those in its derivatives dept US$100+M in bonuses. Ordinary Americans found it hard to accept. Its CEO Libby who was employed after the govt rescue to fix the company explained that the bonuses had to be given out because they were based on employment contracts signed more than a year ago before the financial mess started and these employees can sue the company for double the payment if AIG did not meet its legal obligations. That explanation wasn't enough...contract or no contract, Americans just simply couldn't accept what was seen as unfair compensation. AIG had to increase the security for its staff and advised them not to wear their employee pass in public. The outrage subsided a little when AIG executives volunteered to about half of bonus. In Britain, the home of former RBS CEO Goodwin was vandalised[Link]. Goodwin has become a hated figure seen as a symbol of greed that caused the current crisis. He refused to give up his hefty pension and that enraged many Britons.
"We are angry that rich people are paying themselves huge amounts of money while ordinary people r unemployed, destitute & homeless."
- Group calling themselves BankBossesAreCriminals (BBAC)
In Singapore we have had 2 cases that raise some eyebrows - CDC staff who were paid 8 months bonus(anyone knows what happened to JohnLaw2012?) and the CapLand CEO who received $20M in bonus. It was explained that the CDC staff performed very well at the job and CapLand CEO deserved his bonus because the company had profits of $2B in 2007.....however it can also be argued that the profits were more the result of a property bubble than his leadership. CapLand did have a cash call in the form of a rights issue a few weeks ago at $1.30....which is dilutive, why didn't they do it when the stock was higher - they would have collected the same amount of cash for the same dilution. The point is it is hard to ascertain what his bonus should be
you can put in arguments for amounts from $1M to $40M, it is subjective and he gets what the board of directors agree to give.
"Cost is not the same as worth" - Movie Shopaholic.
In the AIG case it was explained that the incentives were not aligned with the interests and survival of company. The traders in AIG were rewarded for the amount of CDS (Credit Default Swap) they sold and their contracts did not take into account the risks they were exposing the company to. The end result was the collapse of AIG and the company was required to pay bonsus to the people who caused the collapse. During the ministers pay hike debate, MP Low Thia Kiang challenged the PAP ministers to compensated themselves based on a multiple of the median income of Singaporeans or the income of the bottom 30% of Singaporeans. The PAP govt rejected that idea preferring to link their pay with the top earners of various professions - so what does this link incentivise?
Warren Buffett said that CEO pay was rarely more than 50 times the lowest paid employee in the company in the 1960s and 70s. It rose from 50 times to 100 times to 500 times ....the CapLand CEO is getting a bonus which is 1500 times the income of his office cleaner. Is the CEO of today 10 times or 100 times better than the CEO of 60s and 70s? In 2007, according the Paul Krugman, the highest paid hedge fund manager was paid more than all the school teachers in New York combined. I think he was trying to say that compensation has become decorrelated with the contribution to society. However, it turned out compensation in some cases has become negatively correlated with contribution to society as we have seen in Lehman, AIG, Merrill and RBS.
How did compensation spiral to the stratosphere? A large part of it has to do with the level of profits as a % of GDP and all this is closely related to income inequality & debt. If you look back in history, there was only one period with the same income disparity, debt and level of profits as we are seeing today - the swinging 20s before the Great Depression. What history tells us is this type of income disparity is not sustainable and the high level of profits possible only by keeping wages of ordinary workers low. To maintain the aggregate demand, consumers have to borrow since they don't earn enough wages to buy all the goods produced - that leads to an rise in profits as a % of GDP. These profits have been used to justify CEO+management compensation...but is actually the result of an unsustainable economic system rather than the genius of a few men in the company. Take the CapLand case again, in 2007 we had a property bubble, people borrowed against the future income to buy over-priced property and that led to huge profits for CapLand. The prices cannot be sustained by the income of the buyers and prices sink when they can't pay their debts ....but the CEO of CapLand gets his $20M bonus anyway.
"...you have to pay the market rate or the man will up stakes and join Morgan Stanley or Lehman Brothers or Goldman Sachs" - ,MM Lee April 2007
What we need is leadership that will believes in creating an equitable system not people who will blindly follow an unjust system for their own benefit - that is not what leadership is about. How can we progress and change for the better if we are merely applying the same old formulas without questioning their correctness and validity?
"(PAP already has) ...'to scour the whole country to find the quality we now have' - MM Lee
Perhaps the issue is not the shortage of talent or quality but of values. Good people with integrity will not step forward to embrace a system they do not subscribe to. No amount of money can make righteous people uphold a system that does not believe in democracy, human rights, justice and equality....and no amount of threat and fear can stop some people when they fighting for what is right....