The number game

Playing with numbers can bring great benefits to some and make losers of some innocent folks. One simple number game is the estimation of utilities usage that affects every household. For instance if the average utility bill is $100 pm, and if the meter is only read every third month, the usage of two months will be estimated. To maintain some consistency, the estimates must be done with care, probably by using the latest readings or the moving average, or something in that order, to keep the estimates realistic. But in practice, the method can still bring about distorted results.

Take for instance a festival when there more cooking take place or more people are at home, that particular month would drive up the bill and would affect the next average. It is ok actually if not of the GST or taxes based on the month’s bill. When there is a surge due to a wrong estimate, the household will end up paying more taxes for that bill. When the bill is readjusted after an actual reading is made, would the extra taxes, though small in amount, be refunded? The extra payment comes about when the rate is variable and higher at higher usage particularly water tax. Some households will thus have to pay a bit more taxes that they don’t have to but because of estimation.

In the corporate world, the numbers can also be juggled to give the best returns to whoever wants it. As an example, if a profit of $1m is expected and no extra bonus will be paid, a company with 3 or more years of $1m profit will not have to pay extra bonuses to the management on a profit sharing scheme. But by recognizing, in line with or overriding accounting principles, some profits may be delayed or not recognized and accumulated to another year. So a company may show 2 years of $500k profits only to show a startling performance of $2m profit on the third and ending with a big payout to the management.

This could be a deliberate result of manipulation. But at times, it is due to business cycle. The best example was quoted by Prof Tan Khee Giap during a programme on GDP aired on CNA. He pointed out the great GDP growth of 15% in year 2011, I think, was such a case. The result of that spectacular growth was due to the shrinking of the GDP in the previous years. The base for growth computation shrank accordingly. Thus when the economy returned to its previous numbers, the growth rate or percentage of growth became so much bigger than normal.

A reward system that is based on the growth rate will thus compute a huge payout to the management. And because the growth rate was so big, the payout could be disproportionally big relative to the average payout though the company/economy did not do anything spectacular in real terms.

What happens or could happen in such a situation is for management to take recognition of the low base and the real productivity and massage down the payout. If not, the management will be rewarding themselves happily with outrageous bonuses and still looking very legitimate and deserving, because the bonus formula said so.

The number game can be played very cleverly and ingeniously to benefit the players or designers of the game.