Thursday, February 25, 2010

Those RBS Bonuses

So yes the media is getting into a frenzy after RBS posts a loss of several billion pounds and is still paying out bonuses, presumably out of the bail-out money we gave them.

I have to take a stand with the bank regarding one reason they gave. If Person A makes the bank £1bn in profit, yet Person B makes a loss of £2bn is it fair that Person A is penalised for the actions of someone else?

It's a good argument and on its own makes sense, okay you can sense the but approaching here, but certain aspects don't make sense. For example the Director is voluntarily not taking his bonus; how nice except why was he in line for one anyway. As he's nominally in charge of the company and it made a loss, from the previous argument how could he be included as someone who themselves made money?

Now you could say that the share price has gone up and that's down to his leadership, except when it goes down they're not blamed - so no points there.

The second problem with the argument is that although they're rewarding those who make money, and the secondary reason being given is that they want to keep such people employed, those who lost money aren't being punished. Why is that? Because they know it's a con-job Person A makes £1bn this year but could easily make a £2bn loss next year or vice-versa. Remember the small print whenever you look at stocks and shares - "Past performance is not necessarily indicative of future results"? Yet we're expected to believe that doesn't apply to those manipulating said stocks.

Let's apply this as a thought experiment - put a monkey in a cage with two buttons one black, one white. Now set it so that a peanut is available once a minute provided they press the correct button within that set time frame the reward button is randomly determined with the incorrect button locking out the reward for that minute. Do it for several monkeys and count how many peanuts they ended up with at the end of the day. Then give those that had the most a banana.

Run it again the next day. Would you expect the same monkeys that got a banana last time to get one this time?

Okay the market isn't random, but it might as well be with the number of variables involved. Change the button presses to the first few numbers of the Fibonacci series - black, white, black, black, white white white and how many monkeys would you expect to suss it out? Now multiply that complexity by a thousand.

That's the problem with the bonuses it's rewarding semi-random success while obviously being unwilling to punish semi-random failure.