The risk/reward concept

Lawrence Zammit's article on The Times of Malta

A news item that caught my attention this week was the statement made by the Director of the house run by the Salesians, Dar Osanna Pia, that there are a growing number of youths who are becoming comfortable depending on social benefits. This triggered a line of thinking which I believe we need to address in our country. Do we apply the correct balance between risk and reward in a business environment?

These young people who think that the world owes them a living and are comfortable with living on just social benefits, have decided that they would rather not take any risks by taking up employment and receive social benefits in return. So risk is zero and, presumably, the reward (represented by the social benefit) is high enough to incentivize them to lead the life they lead.

Before we all get very upset that this is not right, maybe we should stop and assess whether we are experiencing similar situations in other settings. I believe we are. There are situations where the risk – reward concept is skewed heavily in favour of the reward side and others where it is skewed heavily in against the reward side.

Let us take as an example senior public officers. These are the persons who are entrusted to run the Public Service. Their security of tenure is zero as they are under three year contracts that may not be renewed, irrespective of their performance. Some have very onerous legal responsibilities. They are managing budgets that run into millions and even hundreds of millions.

In some ministries the human resource complement is much greater than any company in the private sector in Malta. If they were working in the private sector and had such responsibilities, they would probably command a remuneration package that would exceed 100,000 euros. However their package today is nowhere near that amount. And it has always been so. Is there a balance between their reward and what they are expected to deliver, with the risks that this entails? The answer is a definite no.

Another example in this category is an entrepreneur who invests his money, takes enormous risks with one’s personal wealth, creates jobs for others, and generally contributes to the well being of the country. Yet the entrepreneurial class is very often vilified because of the perception, which very often is erroneous, that they make a great deal of profit. This is yet anther example of the risk – reward balance being heavily skewed against the reward side.

We do have the reverse situation, where the risk – reward balance is heavily skewed in favour of the reward. Let us take as an example property speculators. As an aside, property speculators are not entrepreneurs. They buy a property, pull it down, build a block of flats and expect to double their money in the process.

They have been very clever to squeeze home buyers dry, especially first time buyers. They have raised the prices of their properties as interest rates went down and the term of the house loans increased. Thus the monthly mortgage payment has very often remained similar to what it was ten years ago, but the total amount paid for the house has multiplied. With lower interest rates and a lengthier payment term, the monthly mortgage payment should have decreased. Property speculators very often reduce their risks as they push it on to the bank or a buyers. Yet their rewards are super-normal.

These examples and others are evident for all to see. Thus we are sending a message all the time, that money can be made by tilting the balance between risk and reward. We are sending a message that one can make money not by producing a good or service but by fiddling the system such that the correct balance between risk and reward is lost.

This is not the way it should be and we must take action to rectify the situation. This is a sure way of creating an economy that cannot sustain itself.

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