Tuesday, 4 March 2014

Bonuses and organisational type

One of the amazing things about markets are the number of different organisational forms that appear as solutions to problems that people face. When it comes to business the most common form of organisation is the investor-owned firm. Another less common, but still widely seen, form of business organisation is the partnership in which the ownership rights are shared among the workers in the firm. In the UK a large retailing partnership is John Lewis.

At the Adam Smith Institute blog Eamonn Butler makes an interesting observation about people's reaction to the payment of bonuses in investor owned firms and partnerships. He writes,
Staff at John Lewis are looking forward to bonuses totalling £200m this year. Everyone thinks this is wonderful, of course, as John Lewis is supposedly a fine example of a 'mutual', a 'partnership' that is owned by the people who work in the organisation.
Is John Lewis a mutual? Mutuals are run on the behalf of their customers, not their workers.
Staff at the Royal Bank of Scotland, meanwhile, are getting bonuses of £576m. Everyone thinks this is terrible, as the banks are thought 'greedy', not to mention mean to customers who want business loans.

The RBS bonus pot is just over twice that of the John Lewis bonus pot. But RBS has a turnover around 15 times that of John Lewis, £19.7bn compared to just £1.4bn. In terms of the size of the organisation, therefore, RBS bonuses are pretty trifling.
Why then do we see the different react to the paying of bonuses by the two organisations? Bonuses to bankers are often portrayed as going to people who are just 'greedy', just after the big bucks, while no one seems at all upset by the payment of bonuses to the staff at John Lewis. Why? Butler puts the issues this way:
But it is interesting that a bank can pay bonuses of less than a thirtieth of its turnover and everyone thinks it's wicked, and a 'partnership' can pay bonuses of a seventh of its turnover and everyone thinks it's a national treasure.
Butler goes on to argue that the different reactions just shows that the argument is all about politics rather than economic and business reality.

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