Huge bonuses are more to do with power than merit

Male managers tend to give others in the boys’ club large rewards

Share

If you want to hear a corporate titan sound like a Marxist, ask them to justify their bonus. The usual explanation you will hear is that these riches are simply the product of inexorable and impersonal economic forces. There is no human agency involved.

We are told that an executive’s pay – no matter how outrageous it might sound – is solely determined by the market. Since talent is scarce, pay for the gifted is high. But the latest figures from the Chartered Management Institute pose a challenge to the argument, because they show that the average bonus paid to female managers over the past 12 months was 50 per cent smaller than those paid to men doing similar work.

It might, of course, be argued that this is simply a reflection of the unequal distribution of talent between the genders. But thoughtful people will not find that convincing. The truth is that bonuses are only partially determined by market forces. Just as important is the power wielded by individuals within a corporation.

Someone needs to decide how high annual bonuses should be. Chief executives proclaim they have no influence over in-house remuneration committees but this is spurious. Executives and their accountants sit on each other’s “rem” committees and everyone in the magic circle has an interest in keeping pay and bonuses high. On matters of pay the City resembles a cosy club rather than a competitive marketplace. “A warm personal gesture by the individual to himself”, is how JK Galbraith described executive remuneration.

What applies to the boss usually holds for the rest of the senior ranks. That is why female managers tend to do worse. Companies where the management is dominated by men tend to award other members of the boys’ club larger rewards. And even when women have power they sometimes don’t exercise it. In many investment banks, annual bonuses are the product of negotiations between traders and their line managers. But women are less likely to demand large discretionary bonuses than their male colleagues. Despite the propaganda of cosmetics adverts, they don’t think they’re worth it. They’re usually right. But, of course, that’s equally true of the men who do take home obscenely large sums.

A new book by Duff McDonald called The Firm tells the story of a McKinsey consultant called Arch Patton and his role in creating the modern bonus culture. Patton – who wrote books such as Men, Money and Motivation: Executive Compensation as an Instrument of Leadership and What Is an Executive Worth? – became the most sought-after of his firm’s consultants in the 1950s. In some years, he accounted for 10 per cent of billings. The rich and powerful will pay good money to listen to what they want to hear.

Patton’s monument is all around us. McDonald notes that at the end of World War II only 18 per cent of US firms had bonus plans. By 1960, that had risen to 60 per cent. Where America led, Britain followed. The Office for National Statics yesterday reported that total bonuses across the economy rose to £37bn in 2012/13, a 30 per cent real-terms increase on a decade ago.

The bonus gravy train is now out of control. Bonuses continue to flow for managers and employees, even when companies underperform disastrously and value is destroyed. Shareholders – disparate and unorganised – have been unable to impose any real restraint. The time has come to tear down the house that Patton built. A good first step would be to recognise that senior managerial pay is determined not only by merit, but by an individual’s corporate power.

So much for the world’s best traders

Even in the lucrative world of global commodity broking, $7.7bn is a considerable chunk of change. That is how much “goodwill” the trader Glencore has been forced to write-down on the acquisition of the mining giant Xstrata. To put it simply, Xstratata turned out to be worth considerably less than Glencore’s management paid for it in May.

This was a deal at the wrong time. As the commodity-hungry Chinese economy has slowed, global metals prices have slumped. For a supposedly sophisticated trader like Glencore this was a foolish move – and the firm’s shareholders have been the losers. The write-down helped push the firm to a gargantuan $8.9bn first-half loss for 2013. That means that anyone who bought Glencore shares in May will have kissed goodbye to 15 per cent of their investment.

But we shouldn’t really be surprised. The mergers and takeovers that get fee-hungry bankers and analysts in the City of London excited generally end up destroying value for the acquiring company. Glencore/Xstrata’s achievement has been to demonstrate that truth in double-quick time.

b.chu@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Austen Lloyd: Commercial Property Lawyer - Cheshire

Excellent Salary: Austen Lloyd: CHESHIRE MARKET TOWN - An exciting and rare o...

Austen Lloyd: Residential Property Solicitor - Hampshire

Excellent Salary : Austen Lloyd: NORTH HAMPSHIRE - SENIOR POSITION - An exciti...

Recruitment Genius: Gas Installation Engineer

£29000 per annum: Recruitment Genius: A Gas Installation Engineer is required ...

Recruitment Genius: Domestic Gas Technical Surveyor

£28000 per annum: Recruitment Genius: A Domestic Gas Technical Surveyor is req...

Day In a Page

Read Next
Michael Brown was shot and killed by police in August  

Ferguson: The sad truth is that Michael Brown was killed because he was a black man

Bonnie Greer
A protestor poses for a  

Ferguson verdict: This isn't a 'tragedy'. This is part of a long-running genocide of black men in America

Otamere Guobadia
Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

Our partner charities help veterans on the brink – and get them back on their feet
Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

Putin’s far-right ambition

Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

Escape to Moominland

What was the inspiration for Finland's most famous family?
Nightclubbing with Richard Young: The story behind his latest book of celebrity photographs

24-Hour party person

Photographer Richard Young has been snapping celebrities at play for 40 years. As his latest book is released, he reveals that it wasn’t all fun and games
Michelle Obama's school dinners: America’s children have a message for the First Lady

A taste for rebellion

US children have started an online protest against Michelle Obama’s drive for healthy school meals by posting photos of their lunches
Colouring books for adults: How the French are going crazy for Crayolas

Colouring books for adults

How the French are going crazy for Crayolas
Jack Thorne's play 'Hope': What would you do as a local politician faced with an impossible choice of cuts?

What would you do as a local politician faced with an impossible choice of cuts?

Playwright Jack Thorne's latest work 'Hope' poses the question to audiences
Ed Harcourt on Romeo Beckham and life as a court composer at Burberry

Call me Ed Mozart

Paloma Faith, Lana del Ray... Romeo Beckham. Ed Harcourt has proved that he can write for them all. But it took a personal crisis to turn him from indie star to writer-for-hire
10 best stocking fillers for foodies

Festive treats: 10 best stocking fillers for foodies

From boozy milk to wasabi, give the food-lover in your life some extra-special, unusual treats to wake up to on Christmas morning
Phil Hughes head injury: He had one weakness – it has come back to haunt him

Phil Hughes had one weakness – it has come back to haunt him

Prolific opener had world at his feet until Harmison and Flintoff bounced him
'I have an age of attraction that starts as low as four': How do you deal with a paedophile who has never committed a crime?

'I am a paedophile'

Is our approach to sex offenders helping to create more victims?
How bad do you have to be to lose a Home Office contract?

How bad do you have to be to lose a Home Office contract?

Serco given Yarl’s Wood immigration contract despite ‘vast failings’
Green Party on the march in Bristol: From a lost deposit to victory

From a lost deposit to victory

Green Party on the march in Bristol
Putting the grot right into Santa's grotto

Winter blunderlands

Putting the grot into grotto
'It just came to us, why not do it naked?' London's first nude free runner captured in breathtaking images across capital

'It just came to us, why not do it naked?'

London's first nude free runner captured in breathtaking images across capital