Is the US whistle-blower Edward Snowden a hero or a traitor? This is the question that is currently fuelling some heated discussions. Has he simply raised concern about bad behaviour, mismanagement, or other nuisances, for the public good? Can one really call him an ‘informer’ if he acted without hope
The fund management industry gasped this spring when Scottish Widows Investment Partnership (SWIP) gutted its £58bn equity division in Edinburgh, sacking most of the managers and analysts, and switching to an essentially passive management structure. Although many observers bemoaned the decision, they could not fault the decision-making. SWIP had conceded shortcomings in its abilities, recognised new developments in the needs of its clients, and so acted consequently. Compare this behaviour to that of another large fund management firm, having encountered probably much the same challenges. It decided instead to so bizarrely incentivise its underperforming active management team that a passive management outcome was all that could possibly result.
A couple of years ago I attended a speech by Georges Pauget, the then outgoing CEO of Crédit Agricole. The bank had escaped the worst of the financial crisis largely unscathed, so he had a very flattering tale to tell. Remember, bankers were not very popular characters in early 2010; in one poll they ranked just above ‘prostitute’ at the bottom of the list of occupations respondents said they would like to have as a friend.
Financial incentives are a powerful force. It can encourage the brightest minds to embark on entrepreneurial ventures, persuade high-school students to further their education, or prompt to pre-grad college students to drop-out. However in the financial services industry, money incentives have repeatedly revealed negative aspects. The bonus culture has come under increasingly negative scrutiny in recent years as it seems to have encouraged bank employees to prioritize their personal gain over that of the firm or that of society in general.
Anyone who has been there knows that travelling in an Indian city by motor-rickshaw is an adventure. Instead of using the two-lane traffic system as mapped out by the city planners, drivers there navigate at least three abreast through never-ending traffic jams made up of thousands of cars, trucks, buses, rickshaws, and even more bikes, all accompanied by a chorus of horns, bells and whistles. Red lights are often no more than a well-intended suggestion. Of course, you also have to contend with the grazing cows on the roadside and, here and there, with pedestrians who also take their chances in the street.
Why does an interview with former Fed Chairman Alan Greenspan attract so much attention? Sure, Sir Alan is not short of experience: he was the longest-serving head of the most important central bank in the world. But he is not the Fed chief any more. Nor can he continue to lay claim to the ‘maestro’ moniker that wore during his time at the Federal Reserve. By his own admission, the economic philosophy that guided him over a 40-year career was flawed
In a taxi this morning, I couldn’t help noticing how well my driver respected the speed limits and traffic signals. He drove just under 30mph in the city, carefully observed the 15mph speed limits in traffic restricted areas, applied the brakes at the hint of a yellow light, and cruised by a radar control at the prescribed speed. ‘You knew that trap,’ I complimented the law-abiding cabbie. ‘Yeah, they nailed me here when I was a greenhorn. It cost a lot of money and a penalty point on my license,’ he murmured.
At the kindergarten, the rules stipulate that children have to be picked up by 16:00. Late pick-ups are annoying for the caregivers, as one of them has to stay behind with the child until the errant parent arrives. It does not happen too often – the sight of one’s child sitting alone among the assembled buckets, mops and other cleaning materials, as well as the stern glance from the caregiver, makes sure of that.
Anyone who steals, or somehow otherwise appropriates another’s assets unlawfully, and gets caught, can count on being punished. The penalty should be harsh enough to deter recidivism and copycats. This is what the criminal justice system is all about.
Psychologists have long suspected that the motivational effects of financial incentives could already be achieved at relatively low levels of reward. However, trying to replicate the impact of financial bonuses that represent significant multiples of typical income in the laboratory faces obvious funding constraints… unless one brings the laboratory somewhere where typical incomes are low.
The issue of how to structure banker incentives to discourage excessive risk-taking has been actively debated against the backdrop of the credit crisis. Most protagonists could agree that equity-based incentives are bad and that reward schemes linked to the long-term value of the bank’s debt might be better.