Monday, 31 January 2011

Sunday, 30 January 2011

Pay and motivation - bonding vs information

Another little canter around this issue of pay and motivation. One of the books I read recently is Rewards and Intrinsic Motivation: Resolving the Controversy. This is a very thorough and well-argued attack on the idea that rewards undermine intrinsic motivation, rooted in behaviourism. I read it because I knew there had been a big academic debate over the ideas put forward by people like Deci, and I wanted to understand what the arguments against were.

Actually I found the book fascinating, as I do most of the stuff I've read about motivation. On the theoretical level it certainly provides a very good argument for why experimental evidence for motivation crowding/overjustification/whatever you want to call it might be treated cautiously, and could be interpreted differently. I didn't find myself convinced to shift perspective, but it did help point out the weak spots in the views I've developed/adopted.

I also found it enlightening on the practical level, and there are two key things I would point to here. First, there is an entire chapter about getting reward programmes to work. A clear message is that you may need to keep tweaking it in order for it still to provide the reinforcement effect that it is intended to deliver. I say this not to make light of such programmes but because, once again, I find myself wondering about executive pay. When Cameron and Pierce talk about amending programmes there is a lot of emphasis on the reinforcement schedule and monitoring the effects. Since executive remuneration schemes are, I believe, rooted in behavourism (although I expect the vast majority of remuneration committees, and maybe many rem consultants too, are unaware of this implicit model), you would expect this kind of monitoring and modification to be going on. But generally all we see are changes to the reward itself (normally the size) and/or the targets used. Does anyone actually look at whether the behaviours sought are being achieved?

As an aside, I suppose that one could argue that the emphasis of intervention by the FSA to develop longer-term payoffs could be interpreted as a change to the reinforcement schedule, but it's not really intended this way is it? It's more designed as a safeguard that people don't take too much risk in the short-term despite the potential long-term damage it could do.

Second, there are some areas where those informed by behaviourism and those coming from other perspectives agree. A key example is the way that rewards are portrayed and/or perceived. There is a big difference between a reward that is seen as informational (ie you did well) and one that is seen as controlling (ie you should do X and will receive Y if you comply). In the latter case, those coming from the behaviourism perspective agree that there's a potential problem of reactance.

Why does this matter? Well go back to agency theory, and people like Jensen, and you find that much of the discussion about compensation is framed in terms of bonding - making sure that the agent does exactly what the principal requires of them. For example, in the bit I dug out here Jensen talks about using options to ensure that managers do not take too little risk. In other words compensation design (reward design) is often explicitly about control rather than information. Even if you accept behaviourism, implicitly or otherwise, this doesn't sound like a wise way to frame the way you reward executives.

There is one point I would make in the other direction. I argued a while back, before I had actually read much about this stuff, that I think in practice that executives are pretty sure of themselves, and as such interpret rewards as 'I am great at my job'. They may do this even though the intention of the schemes are to engender the idea 'I must fulfill the tasks required of me by the principal'. That's obviously speculative, but perhaps suggests that executive rewards can work in a way that wasn't intended. This might suggest the need to explore how explanatory styles affect interpretation of rewards (and their non-award). How many rem comms do you think have looked at that one....

Friday, 28 January 2011

Justice vs the Bischoff report

I think it's fair to say that for many Labour supporters, especially those of us with an interest in finance, the Bischoff report on the future of financial services that came out in 2009 was a bit embarrassing. I think someone characterised it as 'finance telling stories about finance', which just about nailed it, and it is striking how inward-looking it was. In a previous era a Labour government would surely have made sure that a review of such potential importance would at least include a few of our own people, see the Wilson Committee for example.

Anyway, much as I have tried to erase Bischoff from my memory, it came to mind recently when I was reading a paper about justice and self-interest in an excellent collection called Beyond Self-Interest (I highly recommend this for those of you depressed by public choice types, lots of good stuff in it). The particular paper, by Tom Tyler (top ref here), has a section dealing with the aspects of procedure which determine whether citizens accept that a legal authority is fair. He argues that they are as follows -

Opportunity to participate in the decision
Neutrality of the decision-making process (ie neutral, unbiased decision-makers)
Interpersonal factors - being treated politely and with respect
Motivation - are decision-makers motivated to be 'fair'?
Outcomes - do they consider the decisions to be fair

Now it's not a perfect fit, but it seems to me that we could apply these criteria to things like the Bischoff review too, and doing so probably explains why they leave many of us feeling frustrated. No opportunity to participate, a group of decision-makers we would not consider neutral or unbiased or motivated to be fair, and the 'status quo' outcomes strike us as unfair. Next time we get in power and have to deal with financial reform we should bear these kinds of procedural issues in mind.

PS - makes you worry about Vince's short-termism review too, doesn't it?

The inevitability of further aggro over banking

A few random thoughts over the political car crash I think is yet to come over the future of banking.

I'm not convinced there is an effective political counterweight to the banking lobby. Whilst I think you can get somewhere as an interested outsider, most I think in industries you require a bit more specialist knowledge to identify where the real rip-offs are. That takes time and commitment, not just a desire to attack. I personally think much of the Left-leaning attack on the banks is a bit misplaced for this reason, and as such focuses on the wrong issues (ie splitting retail and investment banking) or focuses on some of the right issues but in the wrong way (all the effort on bonus 'reform' has gone into redesigning the structure rather than questioning the fundamentals - do they work, and can we tackle the scale).

As a result I think politicians are also at a bit of a loss to know how to respond. They sense the public resentment but can't quite channel it effectively because there aren't enough people with the knowledge to help them really sort things out, because not enough change sides. I did hope that the crisis would lead to a shake out of City people who would be willing to help the reform effort, but I don't think this has really happened. As a result I think politicians come to put too much weight on 'common sense' arguments against reform - ie they'll fcuk off to Switzerland - and therefore undertake high-profile but low-impact measures (see bonus reform for details).

In my opinion this is going to end badly. The Tories have done a good job on getting the 'cuts are necessary to clear up Labour's mess' narrative stuck in people's minds (especially the minds of media types), but the other bit of popular wisdom I hear increasingly is "the banks made the mess, we're having to pay for it'. This second 'common sense' view is surely going to ring louder and louder as the cuts actually start. And this is going to coincide with the consensus amongst bankers turning to 'we've worn hair shirts for two years, now we want the money again'. See Bob Diamond's Treasury committee appearance for details.

The Government can keep repeating that it has taken 'tough action' on bonuses, by making banks pay them in a different way. But the opinion you hear out there in average punter land is not 'why are bankers' bonuses not properly risk-adjusted and subject to long-term performance criteria?' but 'why the hell are they getting anything'. The City lobby in turn will make its ultimatum offer - you can have a bit of the pie too, though just a small fraction of what we get, otherwise no-one gets anything - and fail to understand why people might reject this generosity.

In reality, we probably only had our foot on the throats of the banks for a short time from the end of 2008 into 2009. Since then they have wriggled free and their lobbying efforts have been so successful of late that they've even convinced the Chancellor to drop pretty limited pay disclosure requirements. Let me just repeat that - the banks have convinced the Chancellor that they shouldn't have to disclose more information about bankers' pay. This isn't about the Govt interfering in how much bankers get paid, just tweaking the rules on what gets reported publicly. And the Govt folded in the face of the banking lobby. How much faith does that give you in their ability to push significant reforms through?

Light the blue touchpaper and retire...

Wednesday, 26 January 2011

GMB on Coalition tax on pension contributors

Read this, here. Coincidentally have just been involved in a discussion about this very issue. The govt seems to have united unions and employers against a very stupid idea.

Bonuses not working... for GPs?

It says here.

Monday, 24 January 2011

Musical interlude: scouse agit-pop

Does anyone remember 25th May? A bit like Jesus Jones as interpreted by members of Red Action. Very much the sound of the early 1990s but with nothing but (hard left) politics in the lyrics. Also uniquely Liverpudlian, not only the clear scouser accent of the frontman Steve Swindelli, but also in some of the content. The album was called Lenin & McCarthy and there was an instrumental on there about the Hillsborough disaster.

Anyway, here's one of their tracks, FTRTV (a slightly sweary title if spelled out in full), which delivers the sort of anti-politician rant that makes right-of-centre bloggertarians look a bit like, well, Tories. Watch out for a sample from Ian Bone in there.

Pay and motivation once more

From Intrinsic Motivation at Work:
"[E]xtrinsic incentives can have a greater influence on behaviour when intrinsic motivation is moderate to low. But if intrinsic motivation is already high... monetary incentives provide little or no additional force. Past some point, it simply becomes impossible to be "more motivated" in any sustainable way. So if you are successful in building high intrinsic motivation, don't expect your pay system to have a major positive effect on performance."
Once again, you'd think on this basis that performance-related pay would be better employed for crappy, boring jobs, rather than at the top where you would hope people are already fairly well-motivated.

Worth a read

There's a City AM intereview with NAPF chair Lindsay Tomlinson here. He's always struck me as a very sensible bloke. Don't agree with some of his points (may blog later on this) but worth a read.

Friday, 21 January 2011

Rem comm reform

PIRC calls for a ‘nudge’ to remuneration committees

The membership of remuneration committees should be widened to allow employee or shareholder representatives to participate in order to make their operation more effective and facilitate pay restraint, according to Europe’s largest independent proxy agency PIRC.

In its submission to the Department of Business, Innovation and Skills (BIS) consultation on short-termism, PIRC argues that encouraging remuneration committees to hear divergent views could improve decision-making. This might include allowing employee or shareholder representatives to participate. PIRC’s proposal is influenced by research into group decisions by Cass Sunstein, co-author of the book Nudge which has influenced Coalition thinking on designing effective policy.

Alan MacDougall, PIRC’s managing director, said: “Various solutions have been tried over the years to address accelerating executive pay with little success. It is time that we looked properly at the dynamics of remuneration committees. Broadening the membership to include different viewpoints could improve the decisions committee members make, and introduce some restraint where it has clearly been lacking. Given the Coalition’s interest in the policy applications of research into behavioural influences this seems to be an idea whose time has come.”

PIRC also calls for the Government to consider the benefits of putting more ‘sand in the wheels’ in respect of merger and acquisition activity. PIRC suggests that the Government carry out proper analysis of the benefits of introducing a minimum holding period before shareholders can vote on acquisitions, upping the threshold for a deal to be passed, and giving shareholders in the acquirer a vote.

“There are compelling arguments for ensuring that the long-term owners of public companies have the opportunity to have more of a say on proposed acquisitions. It is also interesting to note that under the current legal framework it can be more difficult to change a company’s articles than to decide who owns it. It seems entirely legitimate to question whether this is an appropriate balance.” said MacDougall.

To help embed stewardship responsibilities within pension funds, PIRC suggests that pension fund trustees be required to undertake an annual review of how they have met their responsibilities as owners during the year. PIRC also argues that that the Government should define fiduciary duty as it applies to institutional investors’ stewardship activities.

Thursday, 20 January 2011

Big vote against exec pay at...

Aberdeen Asset Management. Nearly 30% against, plus a bit more in abstentions. Odd when you think about it that listed asset managers get themselves into trouble over governance issues. You would think they have a bit of internal knowledge to draw on. Ho hum.

Look, it's me!

In Stakhonovite hero of Labour Mr Gray's much delayed post about a session at the TUC's trustee conference last year.

Monday, 17 January 2011

The bonus ultimatum game

There's a nice little piece in an article in Financial News this week. The deputy editor does a run through of the arguments banks are deploying in favour of paying out sizeable bonuses again, and why they don't have much impact. The best bit though is his explanation of the nature of the public's attitude towards big bonuses in the current climate. It is, he says, like a big version of the ultimatum game.

In a sense, the banks are arguing that, yes, they are going to get a very large slice of the pie, but that everyone benefits from the banking 'talent' being located in London, so to push too hard on bonuses would mean we all lose out. This is because the talent will move overseas taking with it tax revenues and jobs. Why, the bankers effectively ask us, wouldn't you logically just accept your own small piece, which you won't get if we aren't here?

Well, in common with the ultimatum game, it seems some people would rather stick two fingers up to what they see as an unfair deal - even if it costs them personally - in order to try and punish the perpetrator. We're willing to risk losing the bankers rather than accepting a few crumbs from their table. Now I don't know how prevalent this attitude is, but it's certainly there. And I suspect this is why the Coalition (or any government) is not going to be able to retreat without paying a price for it. People aren't thinking purely about the net benefits of bonuses, they are also thinking about fairness. Giving in to the banking lobby is like the politicians acting as an intermediary and telling you that you really should accept an unfair offer.

PS. Some people might question whether bankers really do lose out if they relocate overseas. But surely we have to assume that being located in London is currently the best option, taking into account a number of factors including bonus levels. Lower bonuses simply makes the next best option relatively more attractive (assuming there is no public animosity in the other location...!).

Saturday, 15 January 2011

Reforming governance

Much deserved hat-tip to James for pointing this Paul Hirst piece out to me. Here's a long excerpt, relevant to my kind of topics:
We live in an organizational society, yet the forms of control over large organizations both public and private have atrophied. This is most evident in the case of companies. Shareholders in Anglo-Saxon systems seldom exercise the political rights they do have, they exit if they are not satisfied and the secondary market in shares lets them do so easily. They also rely on the market to sanction company management. The notion of the republic of shareholders under the 1862 Companies Act in the UK, which made corporate status readily available for the first time, was intended as the primary means of protecting investor rights, but it has long been a fiction. Other stakeholders have no political rights and often no easy exit option through the market. Modern companies exhibit a clear divorce of ownership and control, where dispersed and indifferent shareholders leave policy to managers. It would hardly be possible to claim that corporate governance performs its political functions well, almost no aspect of the current system is satisfactory from passive shareholders, to weak non-executive directors, to compliant auditors. Yet corporations organized the major part of formal social life.

It is thus essential to consider the role of alternatives to corporate structures. Corporate careers do not breed democratic habits, but compliant and conformist personalities. Low institutional accountability within companies is coupled with the absence of an external challenge from alternative institutions. It is difficult to live outside the structures of hierarchical management or to find the equivalent of the nineteenth century “frontier”, beyond which one can escape. The presence of such alternatives is an essential check on the power of hierarchical organizations over people. They give people the option of exit and to the extent they are readily available temper the power of managerial hierarchies and the conformist norms they impose. Unions did this to some extent, but in the private sector in the UK and USA union density is low, and the current tendency of unions is to promote the further bureaucratization of work. Checking the power of management was once seen as part of “industrial democracy”, extending control collectively to workers, now it should be seen as part of the preservation of democracy in general, promoting the independence of citizens and giving them the experience of exercising authority themselves.

It is unlikely that any generalized reform of corporate governance is possible in the foreseeable future. The managerial class has too much influence and people will identify it with socialism. Promoting alternatives is by no means impossible, however. Thus promoting a strong small business and artisan sector gives individuals an alternative to big corporations and it encourages competition. Likewise defending and extending the mutual sector has the same effect, if mutuals are recognized a distinct institutions that need to be run on the basis of different goals to conventional corporations. This can only happen if public policy makes such alternative options attractive and ring fences them by protective laws. The scope for mutual initiative is considerable, but it depends on the revival of cooperative and mutual political movements.

Thursday, 13 January 2011

Bonus bashing

It's worth remembering, in light of the Tories' capitulation over pay at the banks - not just the amounts, but even disclosure requirements, dis-bloody-closure!- what an about-face this is. Hat-tip to Political Scrapbook for digging this out. Even at the time I thought this was utter nonsense. Much as I am am sceptical about the motivational effects of bonuses, much as I am aggravated by public sector employees receiving huge rewards, pinning bonuses back to £2,000 was ludicrous. What was the idea, to come out with a line midway between Labour and the SWP? All looks rather cynical in light of this week's developments dunnit.

Tuesday, 11 January 2011

Select committee snippet

From the chair Andy Tyrie (via FT blog):
12.00: The ever-spiky Andrew Tyrie, committee chairman, says Barclays shareholders are “interested, clever and uninformed” – given they don’t know what bonuses are being proposed until after the event.

“They are half-asleep,” he suggests.
Not the first time Tyrie has accused shareholders of not being on the ball. I think he gets it slightly wrong though. When we FOIed the letters asset managers wrote back to Lord Myners detailing what action they were taking, many of them simply parroted the banks' own argument - don't push too hard on pay or the talent will move overseas. The mindset needs to change if shareholders are going to be a restraining influence.

PS - Great TUC line on today: Ministers have unconditionally surrendered to the banks

That 'senior investment body'...

So, which ministers has the Institutional Investor Council met with? Not BIS ministers, it seems.
Asked by Lord Myners

To ask Her Majesty's Government on how many occasions in the last six months Ministers and senior officials from the Department for Business, Innovation and Skills have met with the Institutional Investor Council.[HL5259]

The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Wilcox): There have been no occasions when Ministers or the Permanent Secretary have met the Institutional Investor Council. Information on meetings with other senior officials is not held centrally and could be obtained only at disproportionate cost.

Monday, 10 January 2011

Open up remuneration committee membership

Interesting piece here from the High Pay Commission:
The problem with remuneration committees is that the directors who sit on them are mostly insiders. They also sit on other boards and are drawn from a small pool of non-execs. Boards seldom take chances with appointments and there is very little diversity within boardrooms.

This morning, Brendan Barber, who heads the TUC, called for employees to be elected to remuneration committees instead of the close-knit group of directors who currently populate them. I agree with Barber: I would like to see representatives from the workforce elected on to the remuneration committee. One or two employees would inject an important dose of realism into committee thinking on pay. They could also help back up maverick directors who fear to speak out in case they upset the rest.

Boards would fiercely resist a break-up in the cosy consensus that exists over pay. But a reform to the way remuneration committees operate would be a small step towards reducing the vast pay gap in Britain and injecting a little “fairness” into the corporate sector.
I agree with this, and it strikes me that this is one of the key issues in the BIS short-termism review (which people are Googling like mad about incidentally, and winding up here - last minute submissions alert!). What's more I think there's evidence in research into group decision-making that supports the idea - Sunstein's work which I have plugged previously most obviously. I also think you probably need two representatives from employees/stakeholders/investors/whoever in order to make it easier for them to 'defect' - much harder if you are a lone voice against 'authority'.

Sunday, 9 January 2011

A Grauniad columnist tweets...

julian_glover: Oldham polls helpful to LibDems trying to squeeze anti-Lab vote in last week - 2 horse race... - doesn't mean Labour won't win though
Let's be clear about this - the guy is casting this by election as Labour vs The World, and saying that poor polling is helpful because it may encourage Tories to help the Lib Dems defeat Labour.

Saturday, 8 January 2011

Old & Sad polls

Info on UK polling report here. The increase in the Labour vote in two of the polls is basically the same as the Tory and Lib Dem decreases combined. Now it might be that we won votes off both parties. But isn't it more likely that we've won them off the Lib Dems. Or in other words, the decreased Lib Dem vote may well be inflated by tactical voting Tories. If that's the case, and the missing Tory vote has gone largely to the Lib Dems then that suggests a big fall in the LD vote.

Clearly all a bit meaningless till the real result comes in tho.

Heffer's Law

Definitely in action here:
Finally, it was not the banks that brought down our economy: it was the last Government's refusal to regulate them properly, and to moderate the supply of cheap money that allowed them to lend so much so recklessly.
Banks, you see, are a force of nature and cannot be expected to reach optimal decisions about risk-taking on their own. Therefore any mistakes they make are directly attributable to those who fail to stop them.

Friday, 7 January 2011

Roy Keane, asset managers etc

I can't say I'm too displeased to see the back of Roy Keane. It had been a largely disappointing appointment, and the recent run of results in particular had obviously sealed his fate. Him getting the boot did make me think a bit about the way we view 'managers' of all kinds, and some of the wonky thinking involved.

First, and most obvious, is the halo effect. Most Town fans were pleased to see Keane appointed given his record as a player (far more than his record as a manager). But how many times have legendary former players turned out to be poor managers? Why should we assume that your ability as a player has a strong correlation with your ability as a manager? This to me seems to be a clear example of the halo effect. I think it's also a bit indicative of this English thing about the need for players with 'spirit'.

Second, it also makes you think a bit about 'big name' appointments more generally. Let's imagine that Keane had a reputation purely as a manager. It still might not be a good move to appoint him, because his previous success might be in no small part due to the context, rather than skills that were transferable, a point made in this book. This happens a lot in the corporate world, where nominations committees often seem to prefer a big name from outside rather than developing internal talent, the latter group having much more knowledge of the organisation.

Third, let's play devil's advocate. Is a season and a half long enough to judge a manager? Bear in mind we haven't even made the play-offs since Joe Royle was manager, and were under significant financial pressure until mystery man Marcus Evans invested. Maybe there was a bigger job to do than we realised. I'm also struck by the parallel with how we judge asset manager performance. Many mandates run for three years, and sacking a manager after 20 months for poor performance is rare. This is a good thing too IMO since asset managers often get fired at the point at which performance turns around (probably plain old mean reversion), and hired when they are doing well and about to fall away. Trustees might be tempted to 'manage' underperformance by dropping a manager early, when the most effective strategy might be to sit tight.

Have we made that mistake here? Are we falling for the delusion that there is an identifiable and manageable factor (or set of factors) that Keane was unable to address, but that another manager would identify and solve? Perhaps, as Keane himself suggests, we were on the brink of coming good. (Incidentally one might argue that by getting rid of Keane halfway though the season we have also demolished one of our myths - that we give managers time to prove themselves.)

Finally, to bring it back to one of my favourite topics, would anyone think that the reason Keane failed at Ipswich was because his remuneration was structured the wrong way? Serious question - if we think that better targets in executive pay reduce the agency problem, why not the same for football managers? You could even play on loss aversion - put say £1m in an account they can't touch, and then deduct a certain amount for losses or draws. Again I'm playing devil's advocate, and I think most people would expect managers to act in the club's best interest regardless of how their pay is structured. So why do we think differently about directors?

Thursday, 6 January 2011

Death spiral

Lib Dems now at 7%.

Wednesday, 5 January 2011

Caledonia Investments, a Scottish Tory and a PPC

More fun and games with our old friends Caledonia Investments. It struck me the other day that I hadn't checked out if they had given company funds directly to any MPs or candidates. It turns out they have in two cases, search under 'Caledonia' here.

Not big bucks in either case, but they gave £10,000 to David Mundell MP and £10,000 to Sutton and Cheam PPC Philippa Stroud. Both are notable in their own right. Mundell is the sole Scottish Tory MP, representing Dumfriesshire, Clydesdale and Tweeddale. An interesting choice, presumably decided on because in 2005 he won the seat with about a 2,000 vote majority and the Tories wouldn't like to have their Scottish representation removed again. It's not entirely clear to me how that might align with Caledonia shareholders' interests, but hey.

Philippa Stroud, who stood unsuccessfully for the Tories in Sutton & Cheam (against a Lib Dem by the way), briefly hit the headlines for the wrong reasons during the election after The Observer ran a story claiming a religious group she was involved in tried to 'cure' gay people. She denied it outright though, and it looks like it might have been a bit of a hatchet job.

Tuesday, 4 January 2011

The Streets and hedonic adaptation

Mike Skinner interviewed in The Grauniad t'other day:
"What I was trying to get across with that album is that your pendulum of emotions doesn't change. Before you're famous, you think that that pendulum of emotions is down to your circumstances. You think: I'm having a good day; I'm having a bad day – something shit's happened. You put in [to the equation] the incredible amount of money and opportunity with women and free clothes and screaming audiences… but you still have good days and bad days."

Monday, 3 January 2011

Hutton Review on exec pay

I can't help thinking the answer is staring us in the face. Hutton says:
Counter-intuitively, the revolution in pay has been accompanied by great improvements in corporate governance and transparency.
But at the same time:
Over the 1980s and 1990s the executive remuneration package was revolutionised, in the United States and then in the UK, as shareholders employed greater use of share-based incentives that sought to tackle head-on the principal-agent problem.
Institutional investors are typically managers of portfolios of assets constituting many companies. They are paid to manage the assets according to their assessment of prospective risk and value rather than intervene actively in managerial decision-making of individual companies. Meanwhile individual shareholders have comparatively tiny holdings and have neither the resource nor power to deliver any change.
Using agency theory and the assumption of opportunistic managerial behaviour led to shareholders encouraging the use of equity-based and performance-related pay. Aside from the fact that I think this is a wonky model of managerial motivation, if we combine a push for big dollops of cash/equity tied to 'performance' with a lack of effective shareholder oversight (resulting from widely spread small holdings and little CG resource) wouldn't we expect to see exactly what we do?

Tory/Lib Dem lash-up

There's a steady stream of articles like this now. Left-leaning Lib Dems should take note.