Returning to the Business of Bonuses

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When everything came crashing down there was considerable discussion of the ‘bonus culture’; primarily but not exclusively in the finance sector.  Bonuses were tied to outputs that, while rewarding the individual (usually a senior management figure), played mayhem in the economy –as if the dispensing of loans for property speculation is a measure of commercial success.

Bonuses, in general, have been with us for a long time.  It actually started among workers and was paid out as ‘piece-meal’ work – the more you shovelled, the more you harvested, the higher the pay This benefited only a few, especially as the total pot of remuneration rarely grew – it was just redistributed (but it did get workers to produce more for their employers).  But as economies industrialised, bonuses became a phenomenon of management and those with special skills; and as the financial sector was deregulated, bonuses became associated with bankers – senior bankers.

Bonuses are justified on the basis of ‘rewarding performance’ or ‘attracting the talented’.  That’s the justification – a hypothesis rarely tested.  It can reward some aspects of work but it ignores others; they can attract some talent but demotivates other talent.  Employees rely on the fixed income of their wage – either the direct or social wage; bonuses can have a distorting effect and can leave employees reliant on HR whim no matter how dressed up it might be with metrics that aspire to measure productivity.

Whatever the justification, there is one thing we can be sure of:  bonuses benefit higher income employees; namely, managers and professionals.  Very little trickles down to workers on the shop and office floor, production line or building site.   The CSO used to measure bonuses by type of employee – not so anymore.  But we can reasonably assume that the share-out is much the same today.

Bonus 1

The CSO data shows managers and professionals received, on average three times the bonus of that white-collar workers received and six times the amount that blue-collar workers got – all  these in the first quarter when bonuses are highest (reflecting year end results). It is important to note the inequality of bonus payments when measured against regular payments:

  • Managers & professionals received 2.3 times the weekly earnings as white-collar workers; however, they received three times as much in bonuses.
  • Again, managers & professionals receive 2.1 times the weekly earnings as blue-collar workers; however, they received more than six times as much in bonuses.

In some sectors, this inequality is even more pronounced.  In Industry, managers & professionals received twice the weekly earnings as blue-collar workers; when it came to bonuses, they received more than eight times.  A similar extreme can be identified in the financial sector.

In addition to bonuses are the benefits that employees get in kind.  The CSO used to break this down between

  • Benefits-in-kind: company cars, stock options & share purchase schemes, voluntary sickness insurance, staff housing and other free or subsidised benefits (e.g. canteen facilities, childcare provision, health costs)
  • Other Social Benefits:  pension fund contributions, life assurance premiums, income  continuance  insurance  as  well  as  other  employee-related  payments  paid  by  the employer

This is data from 2008 (the last year they performed this breakdown) but it is not likely that the proportions have changed all that much.

Bonus 2

In addition to increased bonuses, managers and professionals took far more in benefits-in-kind.  This is why, when looking at ‘pay’ we should be careful to include all elements of the remuneration package, where the data is available.

So what’s going on now?  Unfortunately, we don’t have this detailed breakdown anymore which is a shame because this detail can make for a more informed debate and policy-making (I understand that the CSO discontinued this detail as it was concluded that the supply of data was a burden on businesses).

However, we do have data on sectoral trends.  Below we look at the sectors with the highest bonuses:  Finance and Information & Communication.

Bonus 3

In the total economy, bonuses have increased marginally since 2008.  However, in both the financial sector and information & communication, bonuses have risen substantially, and are now well above the 2008 levels.

An earlier series from the CSO shows that bonuses in the financial sector were €4.61 per hour back in the 4th quarter of 2006.  Last year they were €4.30.  This would suggest that financial sector bonuses are back at their pre-crash levels.  Recovery, indeed. The next release in the CSO series will tell a story:  the first quarter of the year is when bonuses are at their peak, with the next biggest quarter being the 4th.

It is not possible to measure benefits-in-kind and other social benefits as there are no data.  However, it would be reasonable to assume that as bonuses rise, so do these benefits – further fuelling income inequality.

In addition, in the high-bonus sectors, these bonuses are making up more and more of weekly earnings.  In the financial sector, bonuses made up 5 percent of total earnings in the 4th quarter of 2012; in the 4th quarter of last year, this rose to 14 percent.  In the Information & Communication, they rose from 7 to 11 percent.  So this, too, impacts on inequality.

But this is a rich source of tax revenue for the Government.    Given that most bonuses go to higher-income earners, most of this would be subject to a tax return of nearly 63 percent (the employees’ income tax/USC/PRSI along with employers’ PRSI).

In many areas the Irish recovery looks more like a ‘returning’ – to pre-crash patterns.  At least for those fortunate to benefit from bonuses and benefits-in-kind (and if you’re a manager in the ‘Managers & Professionals’ category, you’re in a strong position to reward yourself).  And you are really fortunate because the government is intent on giving you more tax relief.

This is pay-back on the double.  Let the good times roll.

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