Authority and competence

In Australia and New Zealand, April 25 is known as Anzac Day, and commemorates the bravery of the soldiers who fought in the Gallipoli campaign, and in subsequent battles and wars. The Gallipoli campaign was also something of a disaster, although in the general consideration of World War 1, not an exceptional disaster. In my sequence of futuristic novels, one of the issues I am looking at is that of governance, and World War 1 shows possibly some of the worst aspects. The question is, why should some people command or govern? What should qualify them for that responsibility?

The Gallipoli campaign was considered as a sideshow by the British leaders, even the second best in equipment and leaders was too good for it, and it showed it during the performance. The campaign started with an ill-advised naval bombardment. All this did was to alert the enemy that the British were coming. Then followed four weeks wherein the Turks could reinforce their defences. Had there been no landings, this bombardment could have been inspired, but there were. The Anzacs landed at what was called Anzac cove, terrain that was ideally suited for defence. It is reputed that they landed at the wrong place, thanks to faulty navigation. However, that was far from the worst that happened.  When it was clear that the Anzacs were bogged down, the British did what should have been done initially: they landed a force of 20,000 men at Suvla Bay, to be opposed by only 1500. This should have been a straightforward victory, but the Turks had a very strong ally: the British generals, who, Sir John Monash was later to describe as the most abject collection of generals ever assembled at one spot. The planned attack at Suvla Bay was excellent in concept, but it required vigorous leadership.

Here we address the problem of how to lead? Perhaps the most important feature is to give clear instructions. This landing appeared to be plagued by the need for secrecy, a need so well kept that the landing forces themselves did not know what they were supposed to be doing. Few officers even had maps, and worse, half the maps were Turkish and half had place names translated into English, so communication between officers was difficult. To add to this, previously the 10th Division at Gallipoli was commanded by Lieutenant General Mahon, who, however, was regarded as an indifferent commander. The problem now was that whoever commanded at Suvla had to be senior, and resources were limited. Eventually, of the available Generals, they settled on Stopford, who had never commanded in combat and had been on the retired list since 1909, and was in poor health. The very senior officers under his command were little better in the fitness stakes. The landing was incompetent, being done in the wrong order so that troops had to cross one another’s path to get to their assigned targets, and many just got lost. Once ashore and organized, nobody pressed forward against the enemy, who were grossly outnumbered. Success was at hand, despite the blunders, but nobody could be bothered to get up and take it. Support was missing: seemingly nobody realized that troops in hot conditions might need water, so water remained unsupplied for days. For several days, Stopford could not even be bothered landing, nor even overseeing supply. Finally, the weaponry was inadequate for what was to come later, when the Turks got themselves organized.

The point here is that the more senior you are in an organization, the worse the consequences of stupidity. If a private is stupid, he dies; if a General is stupid, thousands die. Accordingly, it would seem to be highly desirable that those put in authority should have the competence to exercise that authority properly. That has been addressed, at least to some degree, in the more modern armies, where field officers are at least young enough and fit enough to do their jobs, but the concept should apply in many other areas than the military. Does it really?

How to reward people fairly? 3

The usual response to this question is, let the market decide. What could be fairer? Well, maybe a lot. The other side of the argument is, does it matter whether it is fair, because it will be more efficient? So, do you think the market is fair? Do you think it is the most efficient?  Efficient for whom? Who benefits? What does the data say? Here we find a rather big problem: what data do we have that is not complicated by extraneous issues? Salaries for common jobs tend to be preset, and are offered to the applicant on a take it or leave it basis. In some cases, a negotiation takes place, but usually the applicant is in a very weak position, at least with regards to the necessary knowledge of what could be obtained. So perhaps we should look at special individuals.

Amongst the biggest earners are the very top entertainers. Singers who earn their money through royalties and concert tickets have clearly succeeded in a market, and what they get may be seen as fair, although they may complain about the rake-off that the studios, the organizers, promoters, etc take. Everyone knows about the very high payments commanded by successful movie stars, but, the argument goes, the studios do not have to pay them. They could hire much cheaper actors, and some very successful directors do just that. Not only that, but they turn the “Nobodies” into stars. However, for many producers, the “star” is hired to give credibility to the production, and as likely as not, to overcome other obvious deficiencies, and hence the star is a means to sell lots of tickets. If the star is an important component of financial success, then it is only fair that the star gets the proper reward for his/her efforts. Market forces are working, and only those steeped in envy can complain. Is that right?

A similar situation occurs for sports stars. Nobody forces anybody to pay them that much, and they bring in the crowds, so is it not only fair that they get the appropriate rewards? Maybe, but maybe not. I saw recently an account of Spanish football. In the top league there are two or three powerhouses of clubs who acquire, at considerable expense, most of the best players, and the rest have to make exorbitant payments to get lesser players. The only doubt as to who the winning club will be lies in which of the top three will prevail. So, why do I think this is unfair? Well, to start with, if the report I saw is true, it appears that the Spanish football clubs borrow huge amounts from banks, who then forgive the debt, and furthermore, it appears they do not pay taxes. Now, those same banks are evicting people who, due to the financial crisis, cannot meet their mortgage payments, but at the same time, the mortgages continue accruing debt. In short, the poor evictee can never get out of debt, yet gets absolutely no benefit from the money he later pays. That is how serfdom grew! Then, by not paying taxes, the government gets less income and fires some further workers.

Unfortunate, you say, but the worker should not have gotten into debt. Perhaps, but who amongst us has never got into debt? I know in my youth I took out a mortgage to buy a house, and I regarded that as a very good investment because now, in my later years I do not have to worry about rent, eviction, or any of those other problems. Of course one obvious solution is to sell the house or apartment, and use that money to repay the debt. That is a great idea, except that apparently there was an immense splurge of property development in Spain, and I have seen images of rows upon rows of partially finished buildings, and empty finished ones. In this economic climate, there is simply no market because nobody can afford to buy enough of the housing. Supply has greatly exceeded any reasonable demand, and that has happened elsewhere in the world as well. Now, the question is, who was responsible? I would argue, in part at least, the bankers, because they knew how much money was being sent out on housing mortgages, and they knew what the prospects for repayment would be like. The question then is, is it fair that the causes of such crises walk away with fat bonuses and an incredibly affluent lifestyle, while the victims of their incompetence have their lives ruined?

Of course, you may say the world does not have to be fair. Get real! Nevertheless, suppose someone burgles your house and steals from you. Do you agree that is unfair? If so, do you agree the burglar should be punished? If so, why is taking from innocents through devious financial means any better, apart from the fact that it is sufficiently legal you can get away with it? Any thoughts?

How to reward people fairly? 2

In my previous post I raised the question of people being overpaid for what they do. This raises the questions: What is a reasonable reward? Who decides? On what basis do they decide? How much does someone really need to accept the job? Who pays?

The last question is the most straightforward for a company; it is the owners, or the shareholders, who pay. They pay for the salaries, they reap the rewards of success, and they pay the price of failure. Now, you may say, they can afford it, and sometimes they can, but also stop and think about how much of this investment came from pension funds. The managers of the investment funds do not lose, but rather it is ultimately the pensioners, who can least afford it.

Looking at who decides, we now see what I believe is a real problem: the people who set the boss’s salary are often either directly or indirectly setting their own rewards. If the investors vote, it is the managers of the investment funds who actually do the voting, and their salaries and rewards are usually set according “to what is general in the market”, but they in turn are creating the market price by setting CEO salaries/rewards in the companies on which they sit on the Boards. Anyone see a hint of a conflict of interest here?

However, it is the question of what is reasonable wherein the problem lies. A comment on my first post seemed to think that $25 million per annum was reasonable, obviously for a CEO of a really major company. The question now is, why? As I noted in the previous post, someone like Steve Jobs is almost unique, and deserves whatever he can get. There are also some that run small companies, and I have heard of one or two in the finance industry that have made extraordinary returns for their investors, and while they end up billionaires, I see that what they get as quite fair. They made the money in circumstances where just about everyone else was losing it, so they deserve to keep a good fraction of it. A really stellar performance at least justifies stellar returns. The trouble is, only too many get into such positions and turn in quite disastrous performances when the going gets tough. Worse than that, in some cases they can turn in near fraudulent performances, and fraud is probably the least punished crime.

Does fairness matter? I think it will if there is a real resource shortage, as is almost inevitable in the future? If supply cannot meet possible demand, those with large amounts of money have an extremely unfair advantage. To get around this, in my future history ebooks, I have introduced in A Face on Cydonia, a somewhat different system of payment. In this, you can negotiate whatever payment you can get, but there is rationing of all resource-constrained goods, and everyone gets personalized coupons that must be used to acquire them. That means that while higher salaries lead to the ability to purchase more fashionable things, and some other objects such as art that are not couponed, money itself becomes less of a goal. There are no coupons for private jets and so on. Of course, this creates some additional problems that will be part of the plots of future ebooks, however if anyone wants to suggest some, and if they are useful enough to incorporate in some of the follow-up novels, I promise your suggestions will be acknowledged.

How to reward people fairly? 1

Does anyone think economies should not be more efficient? Does anyone think they should not be fair? In the future, resources and opportunities are going to be scarcer, so how do we realize the two goals of efficiency and fairness? This is one of the topics I have included in my futuristic novels, and since I do not have the answers (every answer I postulate, I then show how someone gets around the rules, which then leads to undesirable outcomes) here is the chance for you, the reader, to show me the light.

One obvious current problem is how to reward people fairly? Obviously, what is considered “fair” will vary between people, and it is unlikely that there will ever be detailed agreement, and an example I gave in Red Gold was, on Mars, who gets paid the most: the carrot grower or the pumpkin grower? The carrot grower might claim carrots are more valuable, but the pumpkin grower might claim to produce more oxygen, which everyone breathes, but is inconvenient to charge for its use. There is another problem. Markets appear to be fair, but the general assumption is that the addition or removal of one player makes little or no difference. Where you have only one or two providers for a product, that assumption fails and monopoly behaviour is seldom fair.

What about salaries, particularly for unique positions? Consider Apple Computers. Now it is possible to justify whatever they paid Steve Jobs, because he rescued what was almost a basket case and turned it into what it is now. However, his predecessor took over the leading personal computer company and turned it into a basket case, and at the same time, took home tens of millions of dollars for the privilege of his doing that. That is neither fair nor efficient.

Closer to home (New Zealand) we have a state-owned company called Solid Energy, which, recently, was worth several billion dollars, and is now deep in the minus column. The management, who brought about this disaster, take home what are, for here, enormous salaries. Three examples of their “brilliant management”:

1. They spent something like 70 million dollars on a study to convert lignite to liquid fuels. I could have reached the correct conclusion for a few per cent of that, and got fat on it! There were several reasons why the idea was a lost cause, e.g. they did not own the land, the lignite was very wet, there were major environmental protests promised, the technology is well-known but nobody wants to use it because it is economically wrong right now, and there were more. It was always a dog!

2.  They spent a similar amount of money on a project to grow canola and make biodiesel. The problem was, apart from the fact this is a bad idea in its own right, they planted a huge area in a region where nobody else tried to grow it. The overall yield was negligible, most of the plants well dead before seed formation. They overlooked a golden rule of new ventures: unless you are sure, start with a small experiment. Small costs less when it fails.

3.  Over the last couple of years coal prices were extremely high, so they bullishly expanded. So far, so good. However, they were unprepared for the prices to fall again. Now, you do not have to be extremely bright to work out that the reason prices were high was because supply was short, and the reason for that was that the huge mines in Queensland were shut down due to flooding. Equally, you do not have to be extremely bright to realize that such highly efficient mines would eventually reopen, supply would be full to overfull, and prices would drop. Good management would keep an eye on Queensland, and close down the least efficient in time.

My question is, why did such stupidity justify excessive pay? For that matter, why are so-called investment bankers paid huge bonuses for bubble trading, with the taxpayer picking up the pieces when the bubble bursts? Why do not people who made fortunes generating shonky derivatives and dressing them up all nice go to jail for fraud? That is where I would go if I generated such rubbish and sold it, but it appears that when an “approved bank” does it, it is OK.

None of which answers the initial question, so feel free to offer your suggestions.