Bonus Culture Will Hurt UK in the Long Term

The Evening Standard (London, England), May 10, 2016 | Go to article overview

Bonus Culture Will Hurt UK in the Long Term


Byline: Anthony Hilton city comment

IT is interesting, if depressing, to note how much profit growth at the typical British quoted company over the past decade can be attributed to cost-cutting rather than to investment to expand the business and how this is storing up problems for the future. We cannot pay our way in the world as it is, with today's trade balance worse than at any time since 1948. The weaker our companies become, the less likely it is that we will be able to fare any better in the future.

The cost-cutting takes many forms but has at least two consequences. First, employees today get a much worse deal than they used to and this is in spite of the fact that every annual report contains a paragraph from the chairman saying how valued the work force is. The wholesale closing of finalsalary pension schemes amounts to a truly massive pay cut for all concerned, and goes some way to explain why the share of profits in national income is way above the long-term trend while labour's share is proportionately diminished. It also in part explains why trust in business is low people feel alienated from the system, and so many people need two jobs to get by.

Less visible and probably less obvious is the diminished resilience of firms something which has had interesting consequences in the insurance industry. As each company reduces costs for example, by cutting the number of call centres from three to one, halving the number of maintenance staff, or extending the life of equipment, streamlining the supply chain, or stripping out anything which could remotely be described as fat margins appear at first to improve, giving the chief executive what he desires to satisfy the City. But this too often comes at a cost which is apparent only after the relevant chief has collected his performance bonus and moved on.

Almost every round of cost-cutting makes a business less resilient to setbacks, so that when the unexpected does arise, the effects are far more damaging.

For signs of this it is instructive to look into the reasons why insurers such as Zurich, one of the main carriers of business risk, is having such a hard time. It is experiencing far greater losses than it had come to expect from relatively conventional lines of business. One reason for this, according to an expert in the field if you prefer, a mole is that its business clients are hollowed out and fragile in a way they never were before, so any hit they receive becomes far more costly than similar problems had been in the past. This in turn leads to Zurich being hit with a much bigger bill for business interruption or whatever its specific exposure is.

Meanwhile, company executives have never had it so good. Their salaries have soared so much that even the leaders of the fund-management industry are going public with their concerns. This is in itself a remarkable development. …

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