Bonuses are part of the corrosive 'target culture' – yes, tax them at 90%

Simon Jenkins is right to attack bonuses. They encourage staff to focus on reaching simplified numerical targets
Barclays President Bob Diamond
'Let’s not just look at the hefty bonuses of Bob Diamond (pictured) or Stuart Gulliver. The same pernicious simplification of complex objectives and duties is going on in every sector.' Photograph: Dylan Martinez/REUTERS

A year or so ago I was at rather an exclusive policy meeting in Westminster when I suggested that banking bonuses ought to be taxed at 90%. A horrified silence descended on the room full of MPs and wonks, before most of the senior people in the room rushed to disassociate themselves from any such idea. There I was, trapped in an HM Bateman cartoon: "The man who said bonuses should be taxed at 90%."

So I was fascinated to learn that a conservative figure such as Simon Jenkins, chairman of the National Trust and former editor of the Times, has urged Treasury ministers to stop public sector bonuses and, yes, tax private sector ones at 90%. Jenkins is right not just about banking bonuses, but also about bonuses more generally. He is right not just because they are a waste of shareholders' and taxpayers' money (though they are), nor because they unfairly privilege the richest (though they certainly do), but because they are actually glorified targets. They have exactly the same perverse effect on companies and organisations that they do on public services.

But let's be precise about how they subvert the way managers behave. Just like targets, bonuses persuade them to focus on reaching simplified numerical targets which can't possibly sum up the complexity of the broad objectives we want them to strive for. They are also easy to "game". If the NHS got round the four-hour target for patients waiting on trolleys by buying mobile beds, bankers reach their numbers by blinding themselves to the importance of anything else. Like targets, bonuses narrow complex objectives down to impoverished output figures. They sacrifice broad improvement for narrow outputs. You might as well replace highly paid human beings with extremely expensive machines. They also fall seriously foul of Goodhart's Law (when numbers are used for control purposes those figures will always be inaccurate).

Whether they are public or private, organisations in which senior staff get major bonuses are therefore organisations dominated by targets, and they resemble the target-driven public sector in many ways. They tend to be characterised by the headlong pursuit of narrow measures, gargling with highly inaccurate figures, and what can sometimes look like the dereliction of duty. Hospitals where older patients were seriously neglected were those that pursued targets hardest. "As an investor, I have no interest in how much a manager is paid," said Terry Smith, now chief executive of Tullett Prebon, last week, "but I have a great deal of interest in how that pay is calculated."

Those of us who use public services have become sceptical about institutions that are too high in league tables, those schools that are judged "outstanding", but where the corridors are dominated by target graphs and the paints and poetry books have been locked away. Anyone who wants to see what bonuses can achieve in financial services should read Michael Lewis's book The Big Short, his brilliant exposé of the sub-prime mortgage crisis.

At every level, in the disaster that destroyed the world's banks, the behaviour of staff was dominated by bonuses related to narrow targets. The mortgage sales teams were only interested in how many mortgages they could sell, not whether they could ever be repaid. The bond departments were only interested in packaging up new bonds, packed with mortgage debt, rather than whether or not the debts were sound. Even the ratings agencies were dominated by targets, by how much they could earn from the bond departments, rather than whether they were accurately rated. When a handful of ratings officials finally suggested downgrading some of these toxic CDOs (Collateralised Debt Obligations), Lewis described how they were overruled by managers.

So let's not just look at the hefty bonuses of Bob Diamond or Stuart Gulliver. The same pernicious simplification of complex objectives and duties is going on in every sector. It purports to drive efficiency, but actually does precisely the reverse. So Jenkins is right. Tax all bonuses at 90%. If people deserve to be paid more, then the money should be in their salary. If they don't, then they shouldn't get bonuses.

Follow Comment is free on Twitter @commentisfree