Perverse Incentives

"£6 billion in total was paid out to staff in incentive pay at a time when total shareholder return was down 34% and dividend payments totaled only £2.7 billion." (The Salz Review). Incentive bonuses paid to Barclays' 60 top earners in 2011 allegedly exceeded total dividends paid to shareholders.

First this makes a mockery of the notion of 'residual claimants', the firm's owners, being appropriately rewarded for the risk they take that the firm might go broke, risks that the more richly rewarded employees don't share.

And it also suggests a problem with the more practical side of principal agent theory which has focused on creating incentive structures that align the interests of employees with those of owners. Here they clearly aren't; employees are benefiting substantially at the expense of owners, and doing so by taking enormous risks (e.g., the London Whale) that increase shareholders' risk and reduce shareholders' rewards.

Something, as Hamlet noted, is rotten in the State of Denmark.