Friday, March 20, 2009

Bah, Humbug

You'll want all day to-morrow, I suppose?" said Scrooge.
"If quite convenient, sir."
"It's not convenient," said Scrooge, "and it's not fair. If I was to stop half-a-crown for it, you'd think yourself ill-used, I'll be bound?"
The clerk smiled faintly.
"And yet," said Scrooge, "you don't think me ill-used, when I pay a day's wages for no work."
The clerk observed that it was only once a year.
"A poor excuse for picking a man's pocket every twenty-fifth of December!" said Scrooge, buttoning his great-coat to the chin. "But I suppose you must have the whole day. Be here all the earlier next morning."
In this famous dialogue between Ebenezer Scrooge and his clerk, Bob Cratchit, from Charles Dickens’s A Christmas Carol, we get to the heart of the AIG bonus issue. Scrooge was, in effect, giving Cratchit a bonus, paying him for not working, and this is the origins of bonuses—a year’s end/Christmas gratuity, a reward for good work, something beyond a salary, whether a Christmas turkey or a more substantial cash payment. ( And the Scrooge and Marley enterprise, c. 1840, though the nature of the business is never specified, was probably a merchant trader of the sort that by the late 19th century often metamorphosed into an investment bank.) But by the end of the story Scrooge had learned the lesson of Victorian capitalism—year end bonuses, by inducing a feeling of gratefulness on the part of employees, , were a small sum to pay for creating genuine loyalty to the company. Paternalism enhances rather than diminishes control. (In Rochester they still talk about what “bonus week” used to be at a non-unionized company like Kodak.)

But bonuses, in this system, were never truly an “extra” or unanticipated, a true bonus. They became expected, like a tip to a waiter, and even Bob Cratchit expected the unreformed Scrooge to pay him for Christmas Day. And as companies grew, bonuses grew, especially in businesses that were not unionized and engaged in high end services, like law or finance. It was a way for management to reward favorites, to ensure that no one would ever take their compensation for granted. But over the past half century, especially in finance, the bonus has come to completely dominate all other forms of compensation, and investment bankers worked not for their salary, but for their bonus, as visions of sugar plums danced in their heads. And the belief from the fledgling investment banker to the CEO that compensation would come in the form of an expected and anticipated “bonus” has been at the heart of the catastrophe of our banking system, systematically encouraging risky behavior. And none of this is news, and little of this has received anything but the occasional tut-tut in the media and the occasional impotent lefty jeremiad. But if there is to anything good to come from this AIG bonus mess, it must be that we come to see outsized compensation as a social evil, whether the company is profitable, or like AIG, has been zombie-ized by the federal government. We need to limit executive compensation, across the board, and in every profession, from university presidents that make twice as much as the president of the United States, physicians who make fifty times the amount of the nurses and nurse practitioners who crucially assist them, to Wall Street executives. The problem with the AIG executives is not that they were making too much money and their company failed. The basic problem is just that they were making too money, period. Scrooge was right. Pay people for working, no more, no less. It’s a slippery slope from paying Bob Cratchit for not working on Christmas to the scandal of the AIG bonuses. Bah, humbug, one and all.

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