Caps on Banker's bonuses - Devil is in the Detail

When Gordon Brown tries to garner support for a limit on banker's bonuses one is reminded that talk is cheap. But the devil is in the detail: who decides? what is the right amount of bonus? what will be the side-effects? (certainly an increase in base pay, if not in other fringe benefits)What is a bank? If payment is regulated at banks, will people and business not migrate to other areas of financial markets like brokers, investment banks and hedge funds? (not to mention the likely migration to emerging financial centres that are outside the global G2/G7/G10/G20/OECD cartel?
1-Sept-2009


Better Credit Research one of the lessons of the Credit Crunch

The Credit Crunch that we experienced during the past 2 years has produced – apart from financial pain the world over – an unprecedented amount of hot air. We are talking about the countless statements by politicians and self-appointed pundits in the media and academia who have proposed various measures of reform.
Rather than waiting on the outcome of the ‘Global Dialogue’ we suggest investors rely on common sense and focus on improving their own protection against the recurrence of a similar disaster.
Credit Research should be high on the priority list of every Chief Investment Officer or Senior Investment Professional.
We are not surprised to see strong demand for seasoned credit analysts and expect this to continue. Fortunately the convulsions in the financial markets have also resulted in a number of good quality analysts becoming available through no fault of their own.
Should you be looking to upgrade or expand your credit research effort we would be happy to discuss this with you or someone in your organisation. As a gesture of goodwill we offer a discount on our usual fees for all candidates already on our register that we place with our clients.
12-Jun-2009
 

Wrong time to raise levels of base salaries

Several Investment Banks have decided (or are investigating) to increase basic pay of employees in compensation for (expected) lower bonus payouts in the future. We think that this rush to boost the fixed costs of the business may be pre-mature. A recent report predicted that global investment banking revenues will drop by about a quarter this year. Revenues from the Securities Business may also not hold up after a quite profitable period at the beginning of 2009 and revenues from Asset Management will remain under pressure. Then there is the political aspect as the industry has just been saved from itself at great expense to the taxpayer. Even the well-run companies can only thank governments as without the bailout they would have been gone down together with the weak banks in the financial tsunami of 2008. So it may appear that already well-paid professionals get compensated for the loss of bonuses that may not be there (or might be much reduced) at the end of 2009.
9-Jun-2009


Danger of trying to buy market share

A short press article ('As Merrill Lynch sputtered, it made a big bet on Brazil', Wall St Journal, 10 March 2009) reminded us of the danger of trying to buy market share in any business by throwing money at top people working for the competition.
Not only is it far from certain that the executives lured away will flourish in a different business culture at the new employer. If their recruitment can only be effected at high - or even exorbitant - compensation levels it may also be an indicator that the business one tries to enter has already reached a peak and may no longer offer the growth prospects one is looking for.
Selective hiring of top individuals at top compensation levels may be worthwhile in isolated cases. However, employers should take great care before committing themselves to a large financial outlay and conduct extra due diligence rather than getting carried away or 'falling in love' with prospective candidates.
10-Mar-09


100% retention bonuses for Merrill Lynch brokers

It seems strange that BofA is ready to offer substantial retention bonuses for the retail brokers at Merrill Lynch. Apart from the image-problem that this generosity might create in the present political climate one has to ask the following questions: where would all these brokers move to if they would not receive a retention bonus of this magnitude? Would clients be comfortable moving their funds in these uncertain times? Does Merrill Lynch not have any adequate no-compete clauses in its terms of employment that prevent the brokers from taking their clients with them? And if the financial advisers get these juicy retention payments, what will their customers thing most of whom probably have lost a lot of money?
27-Oct-08


Compensation: what now for cash vs stock split?

Some recent commentators have predicted that in the future the Securities Industry will pay a higher proportion of total compensation in the form of shares and options in order to stimulate a more risk-conscious behaviour pattern among staff. While this may sound plausible it does not necessarily make sense for the majority of employees in a securities firm.

Why should the government bond trader whose P&L is clearly visible at the end of each day and whose book does not contain any long-term risks be paid in instalments that only become due many years after he has produced the goods?

The recent - and ongoing collapse - in the share prices of most brokerage firms and banks is in the majority hitting employees who did not have any influence on the poor decisions made by the senior management of those firms. To add insult to injury one could say that the top executives who have been asked to leave have done much better than those employees that are left behind and have to suffer the consequences of a rapid decline in the value of their company stock or share options that the ineptness of the departing senior managers has caused.
30-Jun-08
 

Bonus Fears: Not as bad as the headlines make believe

Some newspaper headlines predict massive job losses and a substantial drop in bonuses for financial market professionals this year.
Apart from creating a bit of publicity for some of our competitors who are quoted by the media we advise clients and candidates to keep a cool head and focus on the big picture.
Excessive discussions about the expected level of bonuses are a nuisance in the best of times and for many firms the year is only over on 31 December. So there is still a lot to play for. Emerging Markets are booming (too much?), and fund-raising continues at a frenetic pace in the alternative investment field.
04-Oct-07


Exit 'Fred the Shred'- Character traits in Chief Executives

We have never personally met Fred Goodwin but reading an article about him we were reminded that many corporate desasters happened under the leadership of executives that were described as domineering. Whatever the merits of this adjective in Goodwin's case - any analyst worth his salt should scan press articles for similar key words and have a good second look at any business that is run by someone described with these words.
10-Nov-07


Lessons from a Boat Race - Or how to make teams work better together

Can business leaders really learn from a study in which the Cambridge University boat club has been observed at work during seven-months period? That would be the impression one could get from reading the conclusion by Mark de Rond, a senior Lecturer at the Judge business school in Cambridge, who conducted an 'ethnographic' study of the boat team as it prepared for the annual Oxford-Cambridge boat race on April 7. Dr de Rond concludes that a team in a boat is a social entity and it can be a massive brake on the boat if the team members are not all working together.
We think that this is a truism - especially in the lower ranks of management. Earlier in the same column ('Business Life' by Stefan Stern, Financial Times) the author stated that 'at the highest level (of management) you must perform in areas that are beyond your expertise, where the facts are not known'.
This, in our view, is the key problem of leadership. The key to top management performance is not just higher efficiency. Clear targets can easily be defined for staff and lower levels of management - as well as the members of a race team. But Business Leaders have to move into the (dark) future and decisions have to be made where the outcomes are never clearly visible.
In our opinion good management at the highest level requires a balance between good judgement and experience. The same applies to the selection of top management - be it from internal or external candidates. It will always remain a mix of science and art.
3-April-2007


Professionals should do well again in 2007
 

Arbitrary bonus allocation creates legal minefield

The Financial Services Industry is in the middle of the annual round of deciding the size of the bonus pool for its employees as well as the distribution of the payments between the various departments and staff members. Recent Press comments let us send a word of caution to Senior Management and Human Resource Departments.

We are very sympathetic to management's desire to reward those among their staff that they think offer the best potential to make good contributions in the future. So we are not surprised  that employers may wish to award the bulk of their bonus pool to the most profitable employees or to younger staff that they wish to motivate.

However, today's litigious workplace limits the amount of discretion employers have without running the risk of being dragged into damaging and costly legal disputes.

Awarding bonuses on anything less than objective standards creates a legal minefield for the employer as those employees that have received a low bonus may be tempted to have their compensation reviewed by an employment tribunal or even in a court of law.

Some firms still have no adequate internal system to allocate profits on an objective basis and they should now  urgently review their management controls. They will need them so that they can make sure that bonus payments are backed up by hard numbers that can stand up to scrutiny in a court if staff members feel that their bonus was allocated in an arbitrary fashion.
15-Jan-07


Bonus time approaching fast

When discussing bonus trends we always jokingly say that if all the bonus hopes in the City were to be full-filled in any given year, the bonus pool - however large it might in fact be - would have to be twice the size to satisfy the hopes of recipients.

Earlier this year we warned that employers should take great care to award bonus payments in a rationale and well-documented fashion.

Recently we found an interesting piece posted by Freshfields on the Complinet website. This supports our warnings and discusses ways for employers to avoid contractual claims arising out of bonus decisions. The Freshfield article touches on questions such as: Is there any entitlement to be considered for a bonus? To what extent can a bonus be fully discretionary (if at all)? How to avoid discrimination claims.
16-Nov-06



Bonus payments cannot favour the few

Recent court decisions make it dangerous to allocate the bonus pool in a discriminatory fashion. It is sometimes said that the major share of the bonus pool may be given to the proverbial big hitters which bring in the lion share of the revenues.
This can only be acceptable as long as the distribution of the bonus pool is justified by production numbers.
Any deviation leaves firms and their line managers open to law suits by professionals who consider themselves treated unfairly.
Every firm and department always will have a few big producers among staff. Often they are just lucky to be allocated the best clients. This may be due to the fact that they are the best professionals, - but even then their production numbers are only made possible by the presence of an infrastructure supported by their team colleagues. This aspect will always exert a levelling influence on the disparity of bonus levels among staff.
9-Mar-05




Hedge Funds a boon to employment

As we predicted earlier in the year the job market in the financial service sector is vibrant but there is probably no net expansion in overall employment levels. The one factor that should not be ignored is the tremendous support that the job market has received from the extraordinary growth in the hedge fund industry.
While most Funds are small and even the largest group employ at best a couple of hundred people the sheer number of funds and supporting firms or divisions in the traditional securities industry means that many an analyst, salesperson or investment manager that would otherwise have been unemployed is secure for now. This in turn supports salary levels for those in employment in firms that are not directly involved in Hedge Funds.
11-April-05