Time For Spiderman Economics: Power and Responsibility

Ours

Most of the world is outraged at the bonuses paid to the employees of the financial institutions that are at the heart of the crisis that’s enveloped the globe in the past year. However, the employees themselves are equally outraged at the attempts to deny them monies to which they believe themselves entitled. This isn’t a question of contractual entitlement – that’s another matter entirely – but of psychological entitlement. They really, really believe that these bonuses are their right and they really, really can’t understand why they should give them up.

Perverse Bankers

Most of us are understandably puzzled by the seemingly perverse behaviour of bank employees. We don’t get big bonuses and what we do get is tied directly to the things we actually achieve. Yet it’s increasingly clear that the bonuses accrued by financial institutions have been both tied to unpredictable future events and only tenuously linked to the actual performance of individuals.

Some of their arguments are laughable. Financial employees protest that it was only a small number of people responsible for their company’s losses and they shouldn’t be punished for the misdeeds of others. Well, neither should we but that’s what’s going to happen. Many of us are getting laid off because of the misdeeds of the few.

In any case are we truly expected to believe that no one else in these companies knew what was going on? That no one happily collected bonuses based on the company performance while turning a blind eye? That the issues of oversight and collective corporate responsibility don’t apply simply because some else was directly responsible?

Entitlement Bias

So we see financial institutions turning themselves inside out in order to avoid the restrictions governments want to place on their bonus generating capacity. At heart the problem is psychological – the employees of these institutions have long come accept such payments as their due. They truly believe that they’re entitled to these awards and that the attempts to stop them by linking them to true performance are gross injustices.

Although the rest of us can only gawp at the apparent audacity of the institutions and individuals involved it’s important to understand that they don’t see any contradiction in their position. This entitlement bias has been built up over decades of it being the industry norm and changing these attitudes through legislation or moral suasion is simply not going to work. There are deeper psychological processes at work.

Enter Spiderman

What we can do, however, is ensure that any future awards are linked to genuine individual performance. No one should gain any bonus for anything other than their specific responsibilities. All awards should be dependent on future performance as well as current and subject to legally enforceable claw backs on a sliding scale. We need to create a new cadre of incentivisation professionals whose job it is to audit companies to ensure that the bonus plans are fair: remuneration committees beware.

Above all we need to go back to the sources of the funds that fuel this largesse and make sure that it’s much harder for the snake oil salesmen to flog their dodgy wares to the unsuspecting and financially illiterate. We don’t allow people to take to the roads without passing a driving test. We shouldn’t allow people to borrow money without taking an equivalent financial test.

At root we can’t overcome decades of psychological expectation through coercion but we can make sure that any compensation provided is truly earned. At the moment Spiderman may carry the responsibility but the power is in the hands of his enemies. Time for Spiderman to spin his web.

Written by Timarr who focuses on the psychology of investing at the Psy-Fi Blog