Rail 690: Bonus culture incompatible with railways

In the various railway history books I have written, there is a recurring theme of the fraught relationship between government and the railways. Whether it is in America or Australia, India or Italy, there is always tension in that relationship and a lack of clarity over responsibilities. Somehow, though, in Britain, that relationship has always been even more difficult and controversial than elsewhere and that is very much in evidence in the current fiasco over Network Rail bonuses.

To say that the government was floundering is to be kind. Rather, it was clear that policy was being made on the hoof and the issue had been left to drift after last year’s fuss.

This tale has to start with the previous government and the mistake made when Railtrack was pushed into administration. Gordon Brown, despite the advice of the then Transport Secretary Stephen Byers, refused to simply renationalise Network Rail and instead created the current structure of having a ‘company limited by guarantee’ with no shareholders. It was quite clear to observers like Tom Winsor, the Rail Regulator at the time of the Hatfield crash and now the scourge of the police, that this meant there was no oversight of Network Rail. Sure, the regulator was supposed to provide some targets and ensure the organisation was efficient but essentially it has no effective sanction as demonstrated by the ridiculous fines it imposes when there are breaches of the network licence which leave directors’ pay untouched.

Network Rail was set up in the heady noughties when bonuses were seen to be a vital component of any go-getting organisation. Labour ministers, so enamoured with the neo-liberal model of capitalist enterprise, ensured that the Office of Rail Regulation (or Rail Regulator as it then was) actually made it a requirement of the licence agreement with Network Rail that there had to be an incentive scheme.

This is to misunderstand the nature of the railways. The concept of big bonuses based on performance spread from conventional companies, where they were part of the trend of rewarding managers who boosted ‘shareholder value’ rather than developed long term business. A moment’s coherent thought – a rarity in the corridors of Whitehall as far as railways are concerned – would have made ministers realised that there were fundamental problems about giving railway managers bonuses. Railways, for example, kill people. Over the past few years there has been historically small numbers, with only one passenger death in an accident over the past decade, but most years do see a few trackworkers being killed. Therefore it is inevitable that managers will be seen to be getting bonuses in years when some of their fellow workers have been killed.

Moreover, the provision of railway infrastructure is not a growth business. I remember the desperate attempts by those marketing Railtrack shares to show that the railways would grow by using Thameslink 2000 as the kind of project that would lead to more business. It was ludicrous since the increase represented a tiny proportion of the overall network but demonstrating such growth was seen as essential to attract purchasers for the shares.

The bonus incentive scheme for Network Rail, therefore, can be seen in that context. David Higgins, the current chief executive, comes from that culture and has said recently that such incentives are vital to attract ‘the right people’. This is patent nonsense. The top Network Rail managers are already on big six figure salaries – £300k for the executive directors is a starting point – and the notion that they need an ‘incentive’ to do a better job, or to meet targets strikes me as ludicrous. Lower down, too, staff are paid bonuses, but this seems to me daft as well. The ability of any signaller, for example, to so affect overall performance that they would make a difference to their end of year bonuses is unlikely.  Again, surely, signallers, as proud railway employees, would never dream of doing anything but their best to ensure the smooth running of the railway.

The truth is that railways are more akin to a boring utility than a capitalist enterprise at risk of failure if the right products are not developed and which requires real entrepreneurs. Moreover, Network Rail is essentially a government run company dependent on subsidy, another reason to question the decision to create a bonus scheme.

Possibly, through fear of bad publicity arising from excessive bonuses, the government decided that the ‘incentive’ scheme would be determined by a committee of three non-executive members of Network Rail, one of whom was to be the government-appointed special member of the board. Any scheme, though, had to go before the full membership – the 100 or so members of Network Rail who are supposed to have the same oversight as shareholders.

For some years, a very competent director, David Bailey, was the government’s representative on the board but in recent years Mike Mitchell, who was the senior civil servant in charge of the railways until last year, decided that it was inappropriate for him to sit on the Network Rail board. Consequently, oversight was clearly cursory or non-existent as the bonus scheme allowed the directors to double their salary, an extraordinary situation in an industry like railways where there is little scope for rapid change.

The ridiculously high payments did attract the attention of Philip Hammond, the then Transport Secretary last year, but while he complained from the sidelines, Network Rail – which was in a state of transition between the chief executives – blithely ignored him.

However, clearly changes had to be made and this is where it gets complicated, so much so that it seems that even the present Transport Secretary, Justine Greening, and her advisers do not quite understand the situation. The members have often – not least in this column – been castigated as supine and only interested in enjoying high tea with the directors in three star hotels every quarter. However, there is a group of members who have been causing trouble by raising questions over bonuses, and ensuring that opposition politicians are well briefed on the issues.

Following the fuss over bonuses last year, a new incentive scheme involving payments of up to ‘only’ 60 per cent of salaries rather than 100 per cent was passed by an Extraordinary General Meeting of the members in March last year. However, because of concerns by the members that there had not been a proper consultation with the Office of Rail Regulation, this had to be resubmitted to an EGM, the now infamous meeting that never took place on February 10.

During the weekend running up to the meeting, Ms Greening got herself into a terrible tangle. She told the BBC’s Sunday Politics Show that she was angered by the bonuses and would turn up at the meeting, as a member, and vote against them. This was clearly daft. The Transport Secretary is not just one vote in a 100 as she has far more influence given the state’s role in putting £4bn annually into the industry. Indeed, she did not seem to realise that she had the power to appoint a special director who would be one of three members of the remuneration committee.

I claim a small role here. I went on the BBC News Channel at 7 30pm on the Sunday, having been briefed on the special director provision, and suggested that this is what she should do. Lo and behold, by the 10 O’clock news, the policy had changed according to a report by the excellent BBC political correspondent Gary O’Donoghue saying he had been briefed that Greening intended to appoint a special director.

This is not a criticism of Justine Greening who, across the industry is seen as being a listener with a much more open approach than her jackbooted predecessor. Everyone speaks well of her and it was, apparently, her instigation to reduce the fares rise. It is, though, a criticism of those who advise her and highlights yet again the need for a rail agency separate from the dysfunctional Department for Transport to oversee the railways. Clearly, she has been very poorly advised by her civil servants who should have ensured that she knew about her own powers long before she was exposed on TV as not understanding them.  In the event, on the Monday Network Rail then rather belatedly said that the directors had agreed to forego their bonuses for this year and give the money to a safety fund, a decision that had been taken some time previously. So poor Greening had been left to attack bonuses on national TV which were not going to happen and without being properly briefed by her own advisers. I suspect there may have been some teacups flying in the DfT afterwards.

The NR EGM has now been adjourned “sine die” until the ORR and Network Rail come up with a bonus scheme that Greening can support in public. I suspect that is impossible. There is also a row going on between the DfT and the Treasury over exactly how much Greening can so before she has exerted so much control over Network Rail  that its £20bn debts come back onto the government’s balance sheet. Back in the early days of Network Rail, there was a brief period when it became a nationalised company precisely because the then government had determined the incentive scheme.

Let’s get this straight. Higgins and co are not bankers who have cocked up royally and yet trousered vast bonuses. They are honest railway managers doing their best to cut costs and run an efficient railway. I might not buy Higgins’s nonsense about needing incentives to find the ‘right people’ but nor do I think he deserved being targeted in the same way as Fred the Shred. Given the impossibility of creating an acceptable scheme, the only possible course of action would be for Greening, the ORR and Network Rail to get together to scrap the incentive scheme, if necessary leavening it with a small rise in wages, and therefore kill off the issue in the long run. Otherwise every year the railways and the poor transport secretary are going to find themselves under attack and unable to respond.

  • Boldfield

    Every one seems to think that proffessionals need large bonases to do a good job. This is not true abd reflects bady on those that promote it. See the artical below from the New Scientist.  From this the last person you should emply is some one who needs a bonas to motivate them.

    Editorial: “The bonus pay paradox”

     

    If you want to boost people’s performance, don’t bank on bonuses

     

    BONUS culture has come under intense scrutiny since the ongoing
    financial crisis began in 2007. Many people have been outraged by the way some
    bankers and top executives seem to have been rewarded for failure. Others find
    the idea of multimillion‑dollar bonuses morally abhorrent. Even US President
    Barack Obama has gone as far as to call large bonuses “obscene”.

     

    But few have asked whether performance‑related bonuses really do boost
    performance. The answer seems so obvious that even to ask the question can
    appear absurd. Indeed, despite all the fuss about them, financial incentives
    continue to be introduced in more and more areas, from healthcare and public
    services to teaching and academia.

     

    “Economists and workplace consultants regard it as almost
    unquestioned dogma that people are motivated by rewards, so they don’t feel the
    need to test this,” says Alfie Kohn, a teacher turned writer. “It has
    the status more of religious truth than scientific hypothesis.”

     

    So it may come as a shock to many to learn that a large and growing body
    of evidence suggests that in many circumstances, paying for results can
    actually make people perform badly, and that the more you pay, the worse they
    perform.

     

    No one is disputing that bonuses can help companies and institutions
    attract and retain the best staff. Nor does anyone deny that you can encourage
    people to do specific tasks by linking payments to those tasks. Rather, the
    issue is about how to get the best out of people. Do employees really perform
    better if you promise to pay them more for getting results?

     

    There are some obvious reasons why such payments can backfire. It has
    been argued, for instance, that cash bonuses contributed to the financial
    crash, because traders had little motivation to ensure their companies’ long‑term
    survival (New Scientist, 19 March, p 30).

     

    Most bonus schemes are poorly designed, says Malcolm Higgs of the School
    of Management at the University of Southampton in the UK. He thinks the reason
    is that organisations try to keep schemes simple. Nevertheless, he thinks bonus
    schemes can work as long as they align the interests of individual employees
    with the long‑term goals of a business.

     

    Bonuses can also encourage cheating (see “The insider’s
    view”). “Once you start making people’s rewards dependent on outcomes
    rather than behaviours, the evidence is people will take the shortest route to
    those outcomes,” says psychologist Edward Deci of the University of
    Rochester in New York state.

     

    Deci blames stock‑option bonuses for the collapse of Enron and other
    corporate scandals. “In many cases the top executives simply lied and
    cheated to make the stock price go up so they got huge bonuses.”

     

    But the work of Deci and others suggests the problem with bonuses runs
    far deeper than poor scheme design or cheating. In 1971, he asked students to
    solve puzzles, with some receiving cash prizes for doing well and others
    getting nothing. Deci found those offered cash were less likely to keep working
    on puzzles after they had done enough to get paid.

     

    Two years later, a team led by Mark Lepper of Stanford University,
    California, asked children aged between 3 and 5 years old to draw with felt‑tip
    pens. Some were told they would receive a special ribbon as a prize for doing
    so, and duly received it. These children were less likely to choose to draw
    with felt‑tip pens when they were later given a free choice of activities. No
    such effect was seen with children who were not offered a reward, whether they
    subsequently received an unexpected one or not (Journal of Personality and
    Social Psychology, vol 28, p 129).

     

    These studies suggest that offering rewards can stop people doing things
    for the sheer joy of it, an idea known as the overjustification effect. This
    was the basis for a series of books by Kohn in which he argues that rewarding
    children, students and workers with grades, incentives and other
    “bribes” leads to inferior work in the long run.

     

    Those who believe in the power of bonuses fail to distinguish between
    intrinsic and extrinsic motivation ‑ wanting to do something because you like
    it in its own right versus doing something because you want the reward, Kohn
    says. “It’s not just that these two are different, it’s that they are
    often inversely related. The more you reward people for doing something, the
    more their intrinsic motivation tends to decline.”

     

    A “do this and get that” approach might improve performance in
    the short term, but over longer periods it will always fail, Kohn says, as it
    turns play into work and work into drudgery. Bonus recipients inevitably play
    safe, become less creative, collaborate less and feel less valued, he adds.

     

    The existence of the overjustification effect has been disputed.
    However, a 1999 meta‑analysis by Deci and colleagues of 128 studies strongly
    suggests it is real (Psychological Bulletin, vol 125, p 627). “The facts
    are absolutely clear,” says Deci. “There is no question that in
    virtually all circumstances in which people are doing things in order to get
    rewards, extrinsic tangible rewards undermine intrinsic motivation.”

     

    What’s more, the studies suggest that the greater surveillance,
    evaluation and competition that tend to accompany performance‑related rewards
    further undermine intrinsic motivation, and that offering rewards can also stop
    people taking responsibility.

     

    These findings suggest that in the kind of jobs many people do as much
    for love as for money ‑ from healthcare to science journalism ‑ any incentives
    specifically tied to performance, as opposed to a normal salary or
    unanticipated bonuses, may backfire. However, this clearly doesn’t apply to
    someone who gains no satisfaction from their job and does it only for the
    money. “If you are doing a boring, stupid task, rewards cannot undermine
    intrinsic motivation that you don’t have,” Deci says.

     

    In such cases, surely, the more you pay the more you get? Not when tasks
    require brain rather than brawn, according to work by Dan Ariely of Duke
    University in Durham, North Carolina. To allow him to pay relatively huge sums,
    Ariely recruited people living in villages in India. The volunteers played six
    games testing creativity, memory and motor skills, and were offered 4, 40 or
    400 rupees for achieving high scores in each of them. The maximum possible
    reward was equivalent to the amount an average person in rural India spends in
    five months.

    Backfiring bonuses

     

    Surprisingly, the big incentives did not produce big improvements in
    performance. Quite the opposite, in fact. Those offered the biggest incentives
    earned just 20 per cent of the maximum possible on average, compared with
    around 36 per cent for those in the moderate and low‑incentive groups.

     

    In a follow‑up experiment, 24 students in the US were offered cash
    rewards if they performed well enough in a mathematical task and a repetitive
    key‑pressing task. Some students were offered from $15 to $30, others from $150
    to $300. In the key‑pressing task, the higher reward did indeed lead to a
    better performance: on average, the volunteers earned 78 per cent of the
    maximum possible, compared with just 40 per cent for those offered lower
    incentives.

     

    In the mathematics task, however, offering bigger rewards backfired.
    Participants earned an average of 63 per cent of their maximum potential
    earnings when offered the lower incentives, but only 43 per cent when offered
    the higher incentives. This suggests that while bigger bonuses boost the
    performance of people doing simple manual labour, for other kinds of work employers
    might actually get less when they offer large sums (Review of Economic Studies,
    vol 76, p 451).

     

    Why? Many explanations have been proposed. One suggestion is that big
    rewards make people try too hard. “Everyone understands that money can
    have a motivating effect, but it can also affect stress levels,” says
    Ariely.

     

    For simple physical tasks this doesn’t matter, but for complex mental
    tasks it clearly does. Work by Sian Beilock, a psychologist at the University
    of Chicago who studies how pressure affects performance, suggests stress
    interferes with our working memory.

     

    “Our working memory is a kind of mental scratchpad that allows us
    to work with the information we have in our consciousness,” Beilock says.
    “However, when people are doing demanding tasks in a stressful situation,
    we see this system malfunction. They allocate attention to other things, they
    worry about the consequences of, say, not getting the bonus.”

     

    Another reason may simply be that people spend too much time thinking
    about the rewards instead of the task in hand. “Bankers don’t admit to me
    that they get stressed, but they do admit that in October, November and
    December they spend a substantial part of every day thinking about their
    bonuses and recalculating them on a spreadsheet,” says Ariely. “If 80
    per cent of your earnings came in the form of a bonus, I expect you would do
    the same.”

     

    Then again, people will work far longer hours to get big bonuses. For
    such reasons, some argue that experiments like Ariely’s do not apply to the
    real world. However, a few researchers have now looked at the effects of
    performance‑related pay in the real world.

     

    In 2006, Laura Petersen of the Baylor College of Medicine, Texas,
    reviewed 17 studies of healthcare pay‑for‑performance schemes. Some of these studies
    did point to positive effects, with one in particular suggesting such schemes
    could boost childhood vaccination rates. However, there were also some
    unintended consequences. For example, in one case researchers found that
    offering incentives to try to improve the treatment of people with substance‑abuse
    problems made doctors more reluctant to take on the most serious cases (Annals
    of Internal Medicine, vol 145, p 265).

     

    Last year, Thomas Gavagan, also at Baylor, published a study comparing
    rates of childhood immunisation, smear test take‑up and mammography in 11
    primary care clinics in and around Houston. Six of the clinics offered doctors
    up to $4000 in extra payments if they reached specified targets, whereas five
    continued paying a normal wage. There were no differences in performance,
    Gavagan found (The Journal of the American Board of Family Medicine, vol 23, p
    622).

     

    The largest and most comprehensive study of the effect of bonuses on
    healthcare comes from the UK. In 2004, the National Health Service introduced a
    scheme through which family doctors could earn up to a quarter extra on top of
    their basic salary by hitting some or all of 136 targets.

     

    Brian Serumaga of the University of Nottingham and colleagues looked at
    the effect on 470,000 hypertension patients diagnosed in the four years before
    and three years after the introduction of the scheme. They found the financial
    incentives had no effect on the proportion of patients who had their blood
    pressure under control, who were being monitored and treated, and who suffered
    adverse outcomes such as heart attacks, stroke and renal failure. Neither did
    they have any impact on how patients’ actual blood pressure changed over time
    (BMJ, DOI: 10.1136/bmj.d108).

    Full of testosterone

     

    “Having spent three years looking at the evidence of payment‑for‑performance,
    I am astonished at how weak the evidence is,” Serumaga says.

     

    “An assumption is being made that doctors are substantially
    influenced by their income, or even primarily attracted to healthcare because
    of the financial rewards. But if you look at the literature on what actually
    motivates doctors to become doctors, very little of it is related to financial
    reward.”

     

    Politicians and planners of healthcare reforms appear to be unaware of
    these findings. For instance, President Obama’s healthcare reforms, signed into
    law a year ago, include the introduction of the first two federal healthcare
    treatment incentive payment schemes in the US. “For too long quality and
    payment have been separate in our system,” Jean Moody‑Williams, director
    of the Centers for Medicare & Medicaid Services quality improvement group,
    told New Scientist. “Our goal is to align them for the purpose of value.”
    But she admitted that she was unaware of Serumaga’s study, and requested a
    copy.

     

    “President Obama has said he wants his government to be based on
    science and on what is effective,” says one of Serumaga’s co‑authors,
    Stephen Soumerai of Harvard Medical School, Boston. “A lot of economists
    believe incentives are the whole story, however the evidence tells us they are
    wrong.”

     

    Are these findings relevant to other sectors, such as banking?
    “Doctors and those in the other great professions have a completely
    different work ethic because they have a vocation,” says David Buik of
    inter‑dealer broker BGC Partners, who has worked in the City of London for 44
    years.

     

    “Bankers and brokers are full of testosterone, full of adrenalin
    and fiercely competitive. Without the financial incentives there would be no
    need to be competitive. Psychologists may have done plenty of research on this
    but they’re making generalisations that don’t necessarily apply in the
    City,” he says.

     

    In the absence of any rigorous trials, many will no doubt agree with
    Buik. Perhaps they are right. Recently, however, bankers and economists have
    turned out to be wrong about an awful lot of things.

    The insider’s view

     

    “If you can steal your colleagues’ thunder, claim credit for their
    work, blow your own trumpet and kiss your boss’s arse, you can boost your
    bonus,” says Geraint Anderson, who worked for four City of London banks
    over 12 years, before leaving to write Cityboy, a book about the excesses of
    City life. “It also incentivises criminal behaviour such as insider
    trading, market manipulation by spreading false rumours, as well as short‑term
    reckless gambling.”

     

    Financial institutions pay large bonuses that often amount to several
    times annual salary. They do so both to attract and retain staff and to boost
    performance, Anderson says. His last two annual bonuses were £500,000 each.

     

    Like many analysts, Anderson’s bonuses depended partly on the results of
    client surveys carried out by external companies. So he would take clients to
    Michelin‑starred restaurants and strip clubs in the run up to the survey votes.
    “It wasn’t a new tactic, it goes on all the time, but I was particularly
    good at it,” he says.

    In”Clients would say ‘we could give you and your
    bank a commission or we can vote for you in the survey’. I chose the option
    that brought me self‑aggrandisement and a bigger bonus, but didn’t earn my bank
    and shareholders any direct profit.”

  • Paul Holt

    Paragraph 4: “…moment’s coherent thought – a rarity in the corridors of Whitehall as far as railways are concerned – would…”.   Some would argue that ‘as far as railways are concerned’ can be removed.

  • P.J.Owen

    Surely one of the main reasons why the railways in the U.K. now cost so much is that in the privatised system wages and salaries across the whole industry ( with or without bonuses ! ) are vastly higher than they would be now if British Rail had been left intact . 
    Re-integrating the railway would also get rid of all the expensive and unnecessary contracts and compensation nonsense , as well as removing lawyers, accountants, share holders etc from the  scene.  
    Thus McNulty seems to have missed the main need ; get rid of  ‘Franchising’ and the ROSCOS and return to what we had before. 
    PJO

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