Bankers' bonuses

We should support performance related pay

Bankers' bonuses have dominated the headlines since the financial crisis.  Today brought two interesting stories.  Firstly, the EU has agreed in principle a deal to cap bankers' bonuses at two times salary.  Secondly, RBS  (which is 82% owned by the taxpayer) announced it lost £5.17bn in the last year yet will pay out bonuses totalling roughly £600m, with £210m of that going to investment bankers.¹

No doubt, the move by the EU will cause cheer in the popular press.  However, it has been widely documented that as curbs on bonus payments have been introduced, banks have increased base salaries instead.  For any given pay package, taking more of it as salary and less as bonus makes a banker better off, as they face less uncertainty about their (very high) pay.  It also means that poor performing bankers cannot be so easily punished by lower-than-expected pay.

The public finds the 'bonus' word so toxic in the case of losses because they assume a bonus must be a  reward for doing well.  Why could it make sense to have any reward when a bank makes a loss?  In reality, the city operates on the basis that employees loosely expect a bonus of a given size, which is increased when there is good performance, and decreased when there is bad performance.  So a positive bonus can still translate into a punishment for poor performance, if it is below expectation.

This regulation reduces banks' ability to operate under such a performance-related system.  There may be good reasons for that, if bonuses are incentivising traders to take harmful risks.  Nonetheless, the regulation has the potential to make bankers better off by giving them more no matter what happens - and this is not a point you will find discussed much in the press.

In the RBS case, the devil is in the detail.  Most of the loss came from an accounting charge of £4.65bn due to the "fluctuating value of its own debt and derivative liabilities", according to the FT.  The operating profit was £3.46bn, up from £1.82bn a year ago.  And guess what?  Markets & International Banking - the investment banking arm - contributed £2.1bn to that.  Do bonuses totalling £210m still look so unreasonable?

An aside:  it always bothers me how bonuses are reported on a total rather than per-employee basis.  For those who are interested, the RBS results show 15,600 employees working in the Markets and International Banking divisions. Assuming the BBC's quoted bonus figure of £210m for investment bankers (see footnote 1), that works out at an average bonus of roughly £13,500.

1. I have taken the number for the bonus payout for investment bankers from the BBC.  However, my numbers on operating profits and headcount are from the RBS annual statements.  I am assuming the "investment banking" arm to be the International Banking and Markets divisions combined, but it is possible that the BBC has used a different definition.

Challenging an Assault on Oxford Admissions

The Guardian's conclusions are too strong

The Guardian has an article today in which it reports allegations of "institutional bias" against ethnic minority candidates for admission to Oxford University.  The paper has obtained data on admissions, and found that there is a statistically significant difference between the proportions of applicants of ethnic minority students and white students admitted to two subjects - Economics & Management and Medicine - after controlling for an applicant's (eventual) A-Level Grades.  To quote from the article:

The gap has often been explained as being due predominantly to the fact that students from ethnic minorities are more likely to apply for the most competitive courses, such as medicine. But the latest figures, which for the first time break down success rates by both ethnicity and grades for some of Oxford's most competitive subjects, cast significant doubt on these long-running explanations.

Their data blog draws an even stronger conclusion:

[Subject] mix cannot explain the discrepencies within some of those subjects themselves

They miss a rejoinder to this claim.  Any candidate of a given ability, as measured by A-Level grades, is still going to be more or less likely to be admitted depending on which course they apply to.  I achieved high grades at A-level, but given my specific skills and interests I knew I was more likely to be admitted to university economics courses than, say,  history programmes.¹

If ethnic minority candidates are pushed by cultural factors towards courses such as Economics & Management and Medicine (The Guardian only looked at these two and Law), then this will obviously reduce the likelihood of them making the choice which maximises their chance of admission.  If white applicants face no such handicap, then you would expect white applicants to be more likely to be admitted, as they would be more likely to select courses to which they know they are best suited.

Thus, the university's defence - that ethnic minority candidates are more likely to apply to competitive courses, and thus have a lower chance of being admitted - remains intact, even looking at within subject data.

1. Of course, what I am saying here is that ability for a given subject varies in a way that is not captured by A-Level grades, and the paper does acknowledge this weakness ("university spokeswomen were keen to stress A-levels are just one measureof ability, which they say is also ascertained through additional tests and interview"). Nonetheless, they missed this highly important case of such a variation caused by the selection effect which has previously been pointed out by the university.

Inflation and tuition fees

Why count them?

Inflation is set to remain above the Bank of England's 2.0% target, according to today's Quarterly Report from the Bank of England.  The Bank points out that "increases in tuition fees...have added to inflation more recently".   Indeed, the rise to 2.7% in December from 2.2% in September "primarily reflected" increased fees and increased energy bills.  Education contributed on average 0.4 percentage points to CPI inflation in the fourth quarter of 2012.

Because inflation is calculated on a year-on-year basis, it will take many months before the increased tuition fees drop out of the headline inflation numbers.  Although the fees only went up once, you get 12 months of higher headline inflation figures as the comparison is with 12 months earlier.  Moreover, the contribution of fees has been "unexpectedly large".

The benefits of including fees in inflation are unclear, especially given the impact on the index.  The fees system in the UK is complex, and is most accurately described as a time-limited, contribution-limited graduate tax of 9% of earnings above £21,000.  Most students will not over their liftetimes pay the headline 'price' of £9,000.   To be sure, increased fees have an economic impact.  But the effect on purchasing power is much closer to that of increased income tax (which would not directly affect the index, but in the long rung would be deflationary) than increased prices.  Having fees in the index only obfuscates the true level of inflation.