Executive bonuses and a cap on benefits. Two sides of the same coin?

I have been struck by the debate raging about two topics that everyone seems to have an opinion on. The bonuses being paid to big banks chief executives by what is essentially a private company, and the money paid to benefit claimants by the government.

There have been calls for the amount of benefits that one claimant can claim should be capped to £26,000 p/a. There have been similar claims to cap the level of bonus paid to high-flying executives and bankers. However, both of these issues boil down to a fairly simplistic argument. Do these individuals deserve the money they are being paid?

Let’s take a look at both sides of this coin.

Executive Pay

The old adage is that as long as the bonus or remuneration of the executive is commensurate to performance, why should we (the public) get involved in what private companies pay their executives? That argument carries some weight in a free market economy where true competition exists. After all, if it is truly a competitive market, then the market will determine how much an executive is “worth” to a company. A truly competitive labour market will hunt out the skills and abilities that the company needs and ensure that the “market” rate is paid.

However, what appears to be the case in some markets is that an individual can “demand” a certain remuneration, and companies are so concerned that they miss out on employing this person, it becomes an auction, where the services of this person are bought by the highest bidder. The contracts that are then drawn up appear to bear very little relation to performance of the company that they run. Even paying a bonus in shares will result in a significant pay-off as these agreements do not list the amount of shares the individual will get, but merely the value of these shares.

So, we can illustrate this with the recent case of Stephen Hester as he was awarded £963,000 in shares. It appears he was not awarded just a number of shares (irrespective of value). This creates almost a bizarre disincentive to maximise the value of the shares, as if the share value is low when he is awarded this bonus, he will get more shares, therefore increasing the return should the share price rise in the future.

But more importantly, does he deserve such an award anyway? How do you measure the performance of RBS? If you were a shareholder or a customer, what metric would you use to establish a successful performance by the CEO?

The most readily available metric is the share price itself.

The below chart is taken from the BBC News website at 12:56pm on 30/01.

This shows that over the last 12 months, the RBS share price has dropped from approx 41p to 26.87p (12:56pm 30/01/12). Based upon the number of shares issued for this company (59,228,400 – Thisismoney.co.uk 30/01/2012), this represents a drop in the market value of the company of £8,368,972.92. Does this show that the CEO is successful? Successful enough to have 11.5% of that drop in value awarded to him as a bonus? I would suggest not.

Benefit Claimants

In the last few weeks, we have seen vigorous and ideological debate over the capping of benefit claimants, to ensure that no household claimant can claim more than £26,000 per annum. This cap will include every benefit that this household maybe entitled to such as Child Benefit, Tax Credit etc. What is more disturbing about this debate than the cap itself, is the way that benefit claimants are painted as feckless, workshy individuals who would rather live off the state than go out to work.

Now, firstly the cap.

There is an interesting point to make about the amount. £26,000 in benefits is characterised as the equivalent to an individual earning £35,000 per annum after tax and other deductions. The reason why the cap is being characterised in this way is to ensure that people do not want to see benefit claimants living a lifestyle that should only be in the reach of someone who works. So, to help promote this image, stories are being bandied about which “demonstrate” that housing benefit recipients live in mansions, living the high life, all at the expense of the tax payers. It does not matter that these stories are not the norm, it does not matter that these stories are born out of bizarre aberrations, and the failure of officials to track fraudulent claims. The prevailing image now is that someone who is unemployed has a large, flat screen TV, lives in a house that they should not be able to afford, so what incentive is there for them to work.?

The impact of the cap (if/when introduced) is hard to judge. In the area where I live, the average rent for a 3 bedroom terraced property is £475pxm. Add on top of this two adults JSA, two children child benefit, child tax credit, council tax benefit and the weekly amount is estimated at £330/wk. The cap is proposed at £500/wk so it would appear there would be little impact in our area.

However, even in the DWP’s own consultation paper, they estimate that 50,000 households will be affected, and the majority of these households will have children in them. This could be mean that a conservatively estimated 100,000 children could be negatively impacted by these changes. Do these children deserve to bear the brunt of these changes? And what will the government put in place to ensure that the children affected are protected from the real possibility of poverty and destitution? At the moment, I do not see them doing very much at all.

Secondly, the idea that unemployment is a lifestyle choice. That it is now becoming the norm for people to languish on benefits, never needed or aspiring to go out to work.

Now, to look at this we need to look at the figures. For example, we need to look at the number of people who have been claiming out of work benefits for more that 2 years. This figure would give us an idea on how many people are choosing to live off the state rather than go out to work.

When we look at this, 72,580 claimants are over 25 and have been claiming for more than two years. This equates to 0.24% of the working population or 4.6% of the total claimant count (source: nomisweb.co.uk 30/01/2012).

These figures do not suggest to me that the vast majority of claimants are making claiming JSA a lifestyle choice. This shows that a minority are not able to find work (through lack of skills or lack of opportunity). Of this minority, there will be a minority of work-shy or feckless individuals, but they are not the norm. Certainly not worth the amount of column inches devoted to them in the right-wing press, and certainly not worth the anger and venom that is aimed at them when working people are made to feel angry about how they are being “ripped off”.

So, do the majority of benefit claimants deserve the benefits they claim? I would say yes. Support is needed to ensure that they find work, and can remain gainfully employed for long periods of time. It is important to provide that safety net for society to ensure that children are protected and people can get back into work quickly. What benefit claimants do not deserve is the constant, ideological vitriol dished out on a daily basis, which develops a stigma, and creates a false impression of those who may claim benefits in the future.

This debate highlights mainly that people make a judgement on who deserves what in our society, and illuminates where our individual priorities lie. For certain people, the wealth creators should be highly rewarded for the benefit they bring to the economy. For others, the disenfranchised and the vulnerable should be protected from the consequences of actions that were not of their making.

The key though is ensuring that when building a future, more stable economy, the aspirations of the young and the talented are nurtured, irrespective of the background. That means protecting the vulnerable, whose parents may have made difficult life choices through no fault of their own. It means developing businesses and entrepreneurs with the help of large financial institutions. It means ensuring the supposedly “competitive” markets remain competitive, and that an executive labour market rewards talent rather than nepotism. It means education on a level we have never seen before, so that we can deliver true genius over replication and derivation.

Once we have achieved that, we can truly say that what people get is what they deserve. Until that point, the arguments over fat-cat bonuses, or work-shy claimants will rumble on unabated.


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