Value vs Merit
The bonuses being paid to various top executives have been in the news a lot. There's a large debate in the media about whether it's right or not that the CEO of both RBS and Network Rail were more or less forced by public opinion to not take their bonuses. I've been trying to think my way through it.
The most helpful thing is a section I read in the Constitution of Liberty by Fredrick Hayek. Since he is the granddaddy of the economic liberal ideas that underlie the ideology behind the credit crunch, what he says is very useful in determining whether bonuses and the freedom of CEOs to take them is true to economic liberal ideas. This is useful in countering accusations that those against the bonuses are socialist.
He talks about the difference between paying people based on value, which is to do with results, and paying people based on merit, which is to do with how well other people perceive the person to be doing. He argues strongly that paying by value is really the only true way to judge performance in a liberal society. Therefore, bonuses are OK, providing they track the value of work (which they should always do, Hayek argued, in a liberal society, because people can freely communicate with each other and exchange information). The argument is generally an anti-socialist argument, as it argues for leaving a free and liberal market to determine people's pay and renumeration and not to allow governments to pay the poorest more because they need it, or they have it harder.
The irony at the moment as it relates to bonuses is that it also casts bonuses for failure as being very economically illiberal. When times were good, the bonuses were justified by the idea of value. That is, CEOs and others at the top could be paid large amounts because they added a large amount of value and therefore deserved the bonuses they got. Now that there is a recession, however, the argument has shifted to merit. Those at the top argue that things would be worse if they were not there. They believe they are adding perceived value, or merit in other words even as the real value of their companies slumps.
As a fun exercise, iff one applies meritorious thinking to the boom times, it should follow that, since making money was fairly easy, only exceptional performance should have achieved a bonus. I don't remember seeing that argument occur too much at all during the boom times.
I found this way of thinking about it useful because it says two things. The first argument, that it is illiberal to interfere with pay in the free market and therefore the setting of such bonuses, is ridiculous, since it's assumed that such bonuses should never exist in the perfect liberal free market, so therefore it is neither liberal nor illiberal to stop them. Secondly, that the major reason many people are angry is that CEOs and those high up in organisations are guilty of hypocrisy, having argued for value in establishing bonuses, but now switching to merit, to justify them in recession times. I think this hypocrisy is perhaps the most offensive aspect of bonuses.
The most helpful thing is a section I read in the Constitution of Liberty by Fredrick Hayek. Since he is the granddaddy of the economic liberal ideas that underlie the ideology behind the credit crunch, what he says is very useful in determining whether bonuses and the freedom of CEOs to take them is true to economic liberal ideas. This is useful in countering accusations that those against the bonuses are socialist.
He talks about the difference between paying people based on value, which is to do with results, and paying people based on merit, which is to do with how well other people perceive the person to be doing. He argues strongly that paying by value is really the only true way to judge performance in a liberal society. Therefore, bonuses are OK, providing they track the value of work (which they should always do, Hayek argued, in a liberal society, because people can freely communicate with each other and exchange information). The argument is generally an anti-socialist argument, as it argues for leaving a free and liberal market to determine people's pay and renumeration and not to allow governments to pay the poorest more because they need it, or they have it harder.
The irony at the moment as it relates to bonuses is that it also casts bonuses for failure as being very economically illiberal. When times were good, the bonuses were justified by the idea of value. That is, CEOs and others at the top could be paid large amounts because they added a large amount of value and therefore deserved the bonuses they got. Now that there is a recession, however, the argument has shifted to merit. Those at the top argue that things would be worse if they were not there. They believe they are adding perceived value, or merit in other words even as the real value of their companies slumps.
As a fun exercise, iff one applies meritorious thinking to the boom times, it should follow that, since making money was fairly easy, only exceptional performance should have achieved a bonus. I don't remember seeing that argument occur too much at all during the boom times.
I found this way of thinking about it useful because it says two things. The first argument, that it is illiberal to interfere with pay in the free market and therefore the setting of such bonuses, is ridiculous, since it's assumed that such bonuses should never exist in the perfect liberal free market, so therefore it is neither liberal nor illiberal to stop them. Secondly, that the major reason many people are angry is that CEOs and those high up in organisations are guilty of hypocrisy, having argued for value in establishing bonuses, but now switching to merit, to justify them in recession times. I think this hypocrisy is perhaps the most offensive aspect of bonuses.