Don't you believe it: Big bonuses improve performance

It's not about rewards for performance, but how those rewards are shared out.

by Alastair Dryburgh
Last Updated: 09 Oct 2013

Whatever the rights and wrongs of it, when RBS boss Stephen Hester decided to turn down his £1m bonus, he certainly helped the Government out of an embarrassing state of confusion. He spared it from having to come out and say whether, in fact, a bonus is necessary in order to get Hester to do as good a job as he is capable of on behalf of the taxpayer.

Simply asking that question reveals its absurdity. If Hester wants to stay in the £1m-plus club in his next job, he is hardly going to say in a year's time: 'This is what I have achieved, but if I'd been paid that extra million I would have tried much harder.'

The debate over whether bonuses are necessary to persuade senior executives to give of their best will never be resolved until we recognise that we are asking the wrong question. It's not about rewards for performance, but how those rewards are shared out.

In the case of RBS, the Government sank £45bn into rescuing a broken bank and would very much like to get that money back through a successful reprivatisation.

If Hester thinks, as he must, that his efforts significantly raise the chances of that happening, he would like (and it's reasonable for him to expect) a fair share of the wealth he creates in return.

If what you want to do is achieve peak performance, bonuses won't help you. What you need in that case is to resort to a wide range of strategies and techniques known collectively as 'management'. The bonus discussion is something else. It's a negotiation between one factor of production, labour, and another, capital, about how the spoils of their respective efforts are shared out.

It used to be the proletariat which was good at maximising its share through unionisation. As the power of the unions has diminished, the bosses have caught on to their trick. Karl Marx would be smiling if he were reading the newspapers today.

- Alastair Dryburgh is chief contrarian at Akenhurst Consultants and the author of the MT book Everything You Know About Business is Wrong (Headline £13.99). More at www.alastairdryburgh.com

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