I'm intrigued by the furor surrounding the MOD bonuses. I suspect it's mostly an invention of the media, but following the issue of banker's bonuses there's something clearly controversial about a "bonus culture". Firstly, I think it's pretty ridiculous to criticise the compensation packages of people we know nothing about. I have no idea whether the MOD civil servants "deserve" their awards, but I know that comparing their salaries to frontline troops is virtually meaningless. By that standard we might as well point to the billions of people who live on less than a dollar a day, and dictate that no one in Britain should earn more than a £220 a year.
All I know is that the MOD bonuses are spread over a large number of people, and form part of their standing pay agreements (i.e. make up for base salaries that are lower than what they would otherwise receive). For this reason, coupled with my ignorance about what they really do, makes me ambivalent about the news.
But this does tap into a deeper issue. I'm similarly apathetic towards banker's bonuses, since I lack the knowledge of the specific people involved to judge whether they've deserved them or not. John Thain of Merrill Lynch sums up my views pretty well in this interview with Robert Peston (scroll down to 07:50 and start listening at 5min 20sec). His point is that Merrill is a big company with lots of different business units. The people in the departments that lost money have pretty much left, and it's simply impractical to not pay those who had nothing to do with the financial crisis and were engaged in profitable activity.
And this ties into the socialisation of wages that indicates where the hostility might stem from. In principle we should all be compensated based on our unique value creation. In other words, your manager should be able to distinguish between the contribution that you've made to the company, versus your colleagues. In reality most managers cannot do this. Partly because it's difficult to measure (companies require team production, after all), but chiefly because they don't understand their business. If you're reading this thinking I'm being idealistic, I disagree. You should be able to make pay decisions that are non-arbitrary and fair.
The outcome is that high value employees subsidise low value employees. It's no surprise that the company will fail to create wealth if they don't reward value creation.
Because managers usually take the easy route they reward based on things that are easy to measure - e.g. time. Most compensation packages are done in this manner. It's increasingly rare for people to have to clock in and out, but ultimately it's some notion of time that determines your perceived value. Fortunately academics like myself tend to be measured on other things. Whilst the teaching component of our salaries is almost entirely measured by time (e.g. classroom hours), the research component is more likely to be measured based on outputs (i.e. publications). This is why I'm an academic - I don't need to sit in a traffic jam every day, I am at liberty to spend the morning in my study, provided I have something to show for it (and blogging doesn't count).
Part of the hostility to bonuses is, I think, because they're usually used incorrectly. Either it's for overtime (i.e. you exceed your time measure), or it's an arbitrary prize driven by available resources. If the company turns a profit, the communal pot gets bigger. This might play an important role in terms of corporate culture, but employees will quite rightly point to the complete disjoint between their individual performance and the headline figures. If we tie individual pay to the company as a whole, why not outlaw all bonuses if the UK is in recession? This is why so many companies create business units (to capture local knowledge), but note that scaling down shouldn't stop until you reach the individual.
The real issue is whether different roles have systematically different costs of monitoring performance. I suspect that the higher up an organisation you are, the greater your leadership role, the easier it is to estimate unique value creation. Mainly this is because the profit of the business unit you lead is a decent measure. Therefore we'd expect people higher up an organisation to be more likely rewarded on performance (e.g value creation) than efforts (e.g. time).
The way I read this issue is that the majority of the general public associate bonuses with people above them in the corporate hierarchy, and thus part of corporate greed, state-building, the myth of leadership, etc. The bonuses that people tend to receive are arbitrary and detached from what they actually do. This is a failure of management. In an ideal world (or just an ideal company), all employees would see their compensation driven primarily through bonuses. The stigma of having open conversations about value creation and wages would disappear since people realise that such numbers are not purely an incentive mechanism, but a signal that reveals where the actual wealth-creation is taking place.