Bonuses role in the financial melt-down March 16, 2009
Posted by Paul Duignan in : Accountability, Indicators, Measurement, Outcomes models, Outcomes theory, Outcomes theory & politics, Outcomes theory & the news, Reporting systems , trackbackPresident Obama has amplified the attack on bonuses being paid to staff in companies which have been bailed out by the U.S. government (CNN, 16 March 2009). What does outcomes theory have to say about the role of the bonus system in the current financial meltdown? I blogged in 2007 about the problem of bonuses in the financial system and how it was possible the full extent of the melt-down would take time to be revealled. Thinking in terms of an outcomes model, what has happened is that financial institutions should have been aiming (as they do in healthy times) at the overall outcome of Sustainable long-run profitability.
In the outcomes model below this high-level outcome there will be steps such as: Writing enough mortgage business each year and Effectively managing risk. Both of these needed to be done in order to achieve the high-level outcome of Sustainable long-run profitability. What happened was that the indicator which came to dominate the accountability system within sections of the financial industry was an almost exclusive focus on Writing enough mortgage business each year. This is an example of the easily measurable outcome Writing enough mortgage business each year being preferred over the more difficult to measure Effectively managing risk.
Amongst other things it is a case of the easily measurable indicator dominating over the more difficult job of working out how to measure exposure to risk (particularly difficult in a bubble environment).
Paul Duignan, PhD.
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