The Bigger Bang
22/05/2015
The news in today’s newspapers about the fines being handed out to the banks again takes me back to the “big bang”; the change that happened in the City of London in the late 1980s.
Before that date, the city was seen by many as a gentleman’s club. That wasn’t a bad description. But in that pre-big bang state, those in the city had real skin in the game in that they owned (or part owned) the institutions whose money they were gambling. They weren’t just hoping for success, they were concerned about failure and the impact that would have on their wealth and reputation.
It was at that time my wife’s colleague at City University and friend George Webb wrote the book “The Bigger Bang”, and how prophetic that phrase seems to be now!
Now we pay people to gamble other people’s money. And guess what they do? Yes they gamble other people’s money, our money. But such people are incentivised to share in the success but have no stake in the failure. These are the perverse incentives that seem to inhabit our financial world.
I remember as a young manager joining the Unilever share option scheme. It seemed odd at the time. I could invest my money in the shares if the company’s share price went up, but I could take the money out if it didn’t. Almost a one way bet and that is the way we appear to incentivise many executives. But I would prefer to buy shares in a company such as Berkshire Hathaway where those running the business such as Warren Buffett could lose as well as make money.
The consultants Stern Stewart developed their approach to increasing Economic Value Added in the 1990s but even they realised bonuses needed to be pooled so that profits one year were not all paid out, but partly held against future negative consequences over the next two years.
But in today’s markets, we are paying out more in bonuses to employees than the financial institutions are paying out in dividends to shareholders. And we tolerate it! It is high time we got back to basics. That doesn’t mean we don’t incentivise people but that we actually take the time to create an incentive system that encourages people to take appropriate risks whilst managing our money.
Mike Bourne.
Categories & Tags:
Leave a comment on this post:
You might also like…
Come to a virtual study session in May
What are virtual study sessions? These are online study sessions facilitated by Library staff, where you can study independently alongside other students via Teams. They are a great way for you to dedicate specific time ...
Getting started on your School of Management thesis
Writing a thesis, business plan, internship project or company project can be a daunting task, and you might have some uncertainty or questions around how to get started. This post will share some ideas and ...
Sustainability by royal request: Managing an event fit for a King
The Coronation of King Charles III on May 6th 2023, was watched by millions of people around the world with tens of thousands of people travelling to Central London to witness the pageantry firsthand. ...
Getting started on your Master’s thesis
Please note: This post is intended to provide advice to all students undertaking a thesis in the Schools of Aerospace, Transport and Manufacturing; Water, Energy and Environment, and Defence and Security. There is separate advice ...
Finding your tribe: “Joining the sustainability community was the best decision”
For students on Cranfield’s Sustainability Business Specialist Apprenticeship, community and camaraderie is a vital component for success. Designed in consultation with industry, the part-time Level 7 apprenticeship aims to deepen participants’ knowledge of the ...
“My sustainability studies gave me the confidence to take on Amazon”
Not everyone would have the confidence to challenge a big global power like Amazon but, for Colin Featherstone, Senior Technology Manager and Tech Sustainability Lead at Morrisons, his Cranfield studies equipped him with the ...