7 THE ABSENCE OF INCENTIVES TO MANAGE: HOW THE WRONG…
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the proposed management processes were still under development or not yet implemented (Sharp Paine and Santoro 2004). The change in ownership structure had preceded the dramatic growth of the company. Both these changes affected the requirements on management. The challenge of managing within a short-term money culture was encapsulated by the then co-head of investment banking at Salomon. He observed that some people only joined the firm for a few years to make a lot of money. The money culture was explained by the view that the person who earns $10 million for the firm is more valued than the person who makes $1 million, and the person who earns $100 million is a god. A real problem was that if someone were paid $10 million for three years in a row, the manager would have no authority over this employee who had, by then, achieved financial independence. The person would not have to listen to moral persuasion (Sharp Paine and Santoro 2004). The bonus culture had moved from being difficult to manage to unmanageable in Salomon, caused by the growth of the organisation and the changes in ownerships. If an employee was able to become financially independent within only a few years, any medium let alone long-term incentive scheme would have little effect. In one special case, the 31-year- old head of the bond arbitrage group, which made $400 million in profits, took home $23 million in one year (Sharp Paine and Santoro 2004). The short- and long-term complexity is also less relevant for an organisation creating multimillionaires within just part of one business cycle. In a partnership, partners would be incentivised to sustain the firm’s earning power and to continue in existence. Avoiding failure was possibly the single most important objective for a partner. An employee in a listed company would be focused on individual deals and annual remuneration, particularly if the remuneration was so substantial as to overcome any loss of longer-term earning power. By this stage, the bonus culture had moved from being difficult to manage, as in the United States savings bank First Federal in 1975, to unmanageable in Salomon in 1990. If an employee was able to become economically independent within only a few years, any medium, let alone long-term, incentive scheme, such as the early incarnations in General Motors, would have little effect. Even when the annual assessment process for employees had become sophisticated, as in Citi by 1997, the historical problems of not paying bonuses persisted. Action was taken by Warren Buffett in Salomon on the time horizon and scale of compensation. Buffett was critical of the old-fashioned
