Compensation: Excessive focus on individual performance dangerous

Compensation based on share price development? This is contrary to all sensible pay schemes and one of the main contributing factors to excessive executive pay. Maybe this works in the confines of a small investment boutique but even there it is not clear what the scheme could do to improve the performance produced for investment clients.
Excessive focus on individual performance is inherently dangerous, says Barry Olliff | City A.M.

Europe is over-banked says UBS Chairman Weber

I could not agree more. With the arrival of Peer-to-Peer Lending, Robo-Advisers, Internet Banking and more stringent (suffocating?) Regulation the writing is on the wall. Could one suspect that the time of excessively generous compensation will also soon come to an end? And maybe the first to feel the impact of a new and more sober climate in banking could be Axel Weber, the UBS chairman, himself. It is difficult to see why the new banking model can support a salary of Sfr 6,000,000 for what is in essence a supervisory role. Banks in the USA get by without a separate Chairman in most cases and the role is much more modestly remunerated in the UK.

7-Yr Bonus Clawback? You must be joking!

That is what a former Wimbledon Champion would probably say to the psychopathic politicians and regulators (including reckless Bank of England officials busy stealing from Savers). How anyone can be expected to work for seven long years and not be sure that the hard-earned money will be his for good is beyond me. Anyone contemplating a career in banking in the UK should have his head examined. Meanwhile our politicians are busy cleaning up the problems they or their predecessors created, safe in the knowledge that however big the waste of money they will NEVER be asked to compensate the taxpayer.

Why UK's new bonus regime could be the world's toughest (CNBC)

CMI should know better - no point in meaningless comparisons

When the Chartered Management Institute (CMI) proclaims that women on average receive a lower bonus than men one has to wonder what purpose this Institute really serves. Without detailed forensic comparison on a job-by-job basis this discovery - if you want to call it that - is meaningless and can only be considered an effort to get a bit of publicity.

EU Bonus Cap - Welfare for all is ultimate destination!

One may agree with this policy (EU casts wider net for Bank Bonuses, CNBC) or not - but there will be many side-effects, intended or not. Staff will migrate to other sectors, in particular private equity and hedge funds, also traditional long-only fund managers. If politicians then want to extend pay caps the next stop for professionals will be the general corporate sector. That would mean that eventually ALL business compensation will have to be controlled - by politicians with only the slightest democratic legitimacy (Has anyone anywhere had a chance to vote for these measures? Does anyone even know his 'representatives' in the national or European Parliaments?). All this and the question of migration to areas outside the control of Eurocracy is completely left open. We might as well hand all our salary to politicians and just receive vouchers for our daily need - Welfare for all is the destination!

German Managers want banking pay limited - but not their own

A poll conducted by Handelsblatt comes to the conclusion that German Managers favour limiting pay in the banking industry but not in their own companies. How hypocritical can you be? But apart from this questionable aspect limiting pay in the banking industry would mean that only second-rate people would want to pursue a career in banking. This episode demonstrates that the question of pay - especially for senior management - cannot be tackled in specific industries but must be part of a wider solution based on sound management and moral principles.

Salz Report on Barclays - another Figleaf for the Establishment

The lengthy - and ridiculously expensive - Salz Report has to be seen in the long English tradition of conducting expensive and lengthy enquiries when the solution to the problem would just have taken common sense and a willingness for decisive action. Both ingredients are missing. It is not clear why there would have to be an enquiry into Barclays Bank and not into any of the other major banks, investment institutions, regulators and politicians who must certainly share a large part of the blame for problems in the financial sector - and wider economy - that have evolved during the past few years. The proverbial blind man could see that executive pay in banks - but also in investment firms and major listed companies - has spiralled out of control. It leaves a sour - not to say salty - taste in one's mouth when one sees that the costs of the report are such that the 'solution' is part of the (pay) problem. How can anyone justify that a 244 page report that any junior management consultant with his head screwed on could has put together can cost £17 million! And how much of that did go to the City 'Grandee'?

Stalinist Incomes policy - spiteful and arbitrary

The European (Dis?) Union is on the slippery road to serfdom (Hayek) when professional agitators like Sven Giegold (read his CV carefully, you will shudder when you read it!) are given the opportunity to introduce 'laws' that arbitrarily set pay (Financial Times) for a minority of the population that he and his minions want to punish for ideological reasons. It is not possible to argue with these extremists (have a look at what 'Attac' stands for) and the only way to combat the takeover of the pseud-democratic institutions in the EU and the member states is a complete overhaul of the political system based on a radical and comprehensive form of direct democracy safeguarded by a proper bill of rights that bans discriminatory legislation. Those who do not just want to shrug their shoulders or clench their fists in their trouser pockets should contact me and take part in the democratic reform project.

UBS: Will Junk Pay motivate the troops?

I doubt it. When regulators don't regulate properly and management runs the ship aground it is not obvious why 6,500 staff should pay the penalty. Top management may be able to be paid in monopoly money as it has (hopefully) made it's pile and could happily retire even if the bonds that are being paid turn out to be worthless. But any aspiring young - or even middle-ranking - banker needs hard cash to pay to the ever-rising cost of housing, education etc. And is there ever going to be a penalty for regulators or politicians that don't do their job properly. The ECB has just announced that it will hire another 2,000 (useless) bank 'supervisors' in the near future....wish we had another Kafka to weave a novel with this subject matter.

UBS Top Management feathers it's nest (again?)

Having just handled the beginning of the mass cull of employees in the most unprofessional way one could think of, the top management of UBS is already reported to be busy to design another dysfunctional and one-sided 'incentive' plan for itself. The fish always stinks from the head downwards and it is deplorable that despite growing disenchantment about exaggerated bonus and compensation plans for the tiny number of employees at the top of organisations the people at the helm of this bank - an institution that owes its survival to the generosity of the great unwashed public, i.e. the Swiss taxpayer - still are not 'on message'.

Goldman: Internal Probe on 'Muppets' draws a Blank

We are not surprised (Financial Times). Who would commit the word to email or voice mail, let alone a printed document? That person really would deserve to be fired - not for the word but for sheer stupidity. But the problem is this: Investment Banking and Securities Dealing are full of products where the interests of the firm and the customer (we avoid the word client on purpose) are directly opposed. But this is the case in almost all businesses. The vendor wants a high price, the customer a low price. A healthy amount of competition therefore is necessary to make sure that customers get the best service. However, this also requires customers that are intelligent and diligent enough to make sure that their interests are served, i.e. do not get taken in by fancy brochures, the image portrayed by the salesman or invitations to ball games and fancy restaurants. One should always be on one's guard when confronted by sales patter but at the same time no firm will be able to survive if it does not control the urge to take advantage of its customers. This requires more than a nicely formulated 'code of conduct'. It requires constant effort from the top of the organisation down through the ranks. It certainly does not help things if top managers of financial firms pay themselves a king's ransom that is disproportionately large in comparison to the pay that those lower down the hierarchy get paid.

The latest Idiocy from Brussels (via Paris)

Control freaks in Brussels and various capitals in 'democratic' Europe are having a field day planning ever-more convoluted regulations. The latest example are the "Guidelines on sound remuneration policies under the AIFMD" that have just been released for 'consultation' by the Paris-based ESMA. The perfect antidote for those suffering from sleepless nights. I did not expect much before opening the document but 104 (!!) pages surpassed my expectations by a wide margin. Anyone wants to comment? Does the political class really push Europe down to second-class economic status?

Defer bonuses for 10 years?

Andrew Haldane, an otherwise sane Bank of England official, has suggested that bonus deferral and claw-back periods should be extended to 10 years or more for (senior?) bank executives. While we have sympathy for those who think that bank regulation is not up to the task we would consider this proposal to be unworkable and counterproductive. Who in his right mind would be willing to work on that basis? 10 years is an awfully long time - just think of the young banker aged 25 who would have to wait until he is 35 to enjoy the benefits of his effort! You might as well work in a communist system. One has to suspect that the Bank of England officials - typically for the caste of government employees all over the world - simply have lost touch with reality. We have pointed out repeatedly that proper banking reform has still not really been enacted. Stalinist 'command-and-control' systems are no appropriate substitute.

Reply from M. Philippe Lamberts - MEP (Green)

while I agree with you that we have to incentivize banks to go back to their basic mission of collecting savings and using those to fund the real economy, I totally disagree with your statements on pay.

1. There is absolutely no factual or scientific evidence of a correlation between eight-figure salaries and real value creation; in this business, banking executives have basically (up until very recently, see CitiGroup case) been left to determine their own pay, getting away with whatever they dared asking for. The hypothesis of self-interest (greed if you will) driving pay schemes is I believe much more credible than one that purportedly would relate them to value creation.

2. Your statement that a 1/1 relationship between fixed and max variable pay would lead to a hike in fixed salaries remains to be proven; maybe a way for banking executives to have shareholders approve what ended up as absurdly high salary packages was precisely to have the fixed part relatively modest, so as to make size of the real total package less obvious. Those executives might have a tougher sales act to perform in front of their boards and their shareholders should they want to convert a significant part of what used to be variable into fixed pay. I definitely would like to see how they manage before I decide whether or not I agree with your statement.

3. The pay rules that are being proposed are in fact very simple : 1/1 ratio between fixed and variable; 20-fold ratio between average and maximum pay; 40-fold ratio between minimum and maximum pay. I do not believe the adjective "onerous" to reflect that simplicity and I see these ratios as more than reasonable. Administering those limits would not impose an extra administrative burden on firms; as far as I know, they do manage their payroll (with the help of effective and efficient IT systems, I would venture). It would just need them to adapt and publish their existing pay rules, which are hopefully documented. Enforcing legislation would be left to existing supervising bodies; no new ones need be created. Your mentioning of "expensive bureaucracies" gives me the opportunity of questioning whether decently equipped and paid supervising authorities would, in terms of absolute cost, come anywhere near the total impact of financial sector irresponsibility to our societies, which runs into the trillions. That said, I do not see this as an excuse not to tackle the issue of the cost-effectiveness of government as a whole and I do agree that there is still room for improvement in that area.

4. I'd also like to discuss your statement as to "the conviction that unequal incomes are somewhat suspect". On that, I would refer you to Wilkinson & Pickett's "The Spirit Level", which demonstrates a statistical correlation between many key indicators of societal wellbeing (incl. life expectancy, crime, education...) and the level of revenue equality in society. Those who claim that more inequality is beneficial to society as a whole have yet to come up with anything coming close to similar evidence proving what is, I'm afraid to say, belief rather than fact. Everything indicates on the contrary that more equal societies perform better. So I my view, what is suspect is that drive towards absurd - and self-serving - pay packages in an industry that has run amok.

5. Finally, a word on "the Chimera that any problem can be fixed by rules set down by an 'enlightened' technocrat". Beyond that statement, assuming that you agree that problems - at least non trivial ones such as the climate/resource equation or the closely interlinked private and public debt issues - need to be fixed, I do not know exactly how you would suggest to do that. As a citizen, as a democrat and as a lawmaker, I agree that trusting one's future to "enlightened technocrats" is an option that would simply lead us to disaster. I might also say that having seen how unregulated (financial) markets drive the planet and its societies towards collapse, I would not trust our future to them either. What is then left is public, open, fact-based debates leading to decisions to be made by democratically-elected people.

Now, as an author of amendments on banking industry pay, I do not see myself as an "enlightened bureaucrat". I am a politically-aware citizen, who, after a 22-year career in business, got elected and I remain accountable for my work. As you may know, I will need to face my voters in 2014 and I definitely have skin in the game, much more than any banking executive has at the moment. You will therefore understand that have little desire or interest for being lectured by such people on my societal responsibilities. It is not clear to me in what capacity you are writing to me - as a citizen or as a service provider to an industry that has a lot to account for and who stands to lose revenue if pay packages would go down. I will therefore leave the argument at that.

Pay regulation not addressing the real problem

What really drives financial market regulation is not logical thinking but a mishmash of misguided ideology as well as a reversion to good old authoritarian attitudes. The former is derived from the conviction that unequal incomes are somewhat suspect, the latter is the Chimera that any problem can be fixed by rules set down by an 'enlightened' technocrat. This leads to absurd outcomes such as the current proposal to limit any discretionary bonus payment to a maximum level equal to the amount of annual base salary. Not much thought is given to the fact that this will lead to an upward move in basic pay which in turn will mean that the financial institution that pays these higher salaries will become less, not more, stable. Making compensation more sensitive to the time horizon of risks incurred in a bank is another can of worms that regulators seem to be intent on opening. While one has to admit that remuneration policies in many banks and other financial institutions have been found wanting during the past few years this situation is not being helped by the way that politicians and regulators fall over themselves in order to help out the same institutions with public support once they reap the fruits of their profligacy. Proper financial reform - especially the introduction of limited purpose banking - would ensure that the shareholders of the banks - and not the taxpayers - would pick up the bill for any poor management decisions. The need for onerous pay regulation - and an expensive bureaucracy to monitor compliance - would be avoided.

Compensation under control?

Despite our recent positive comment on Barclays Bank we have to put out a critical comment about the compensation practices at the leading (only?) British Investment Bank. It is risible that compensation increases by 2 pct during 2011 when total headcount drops by 6000 over the year. It means that 'cheap' bank and support staff was 'cut' while expensive staff in 'Wealth Management' and Investment Banking was added. This may be an explanation but it should not be an excuse for lax oversight.

Are Bankers really overpaid?

Are all bankers overpaid? This seems to be the conclusion when reading the news on a daily basis. But reports that hundreds of headteachers in London’s schools are now receiving annual pay packages of more than £100’000 indicate that generalisations are inappropriate. Heads enjoy generous holidays, there is very high job security and there is no competitive pressure. They also have managed to escape teaching duties to a large extent. One wonders how they fill their days given that personnel turnover in most school is also relatively modest. The main problem with banker's pay is the fact that senior bankers - CEO's and the top level of management - benefit to a large extent from weak corporate governance that is endemic in all public companies. But this problem should not be used to target bankers in general.

What is the future for banking pay?

Asks Gillian Tett (FT). When even the shares of Goldman Sachs, the company that is supposed to be the Gold Standard for banks, are at best marking time since the IPO in the late 1990s it becomes obvious that something is wrong not only with the compensation structure in the (investment) banking industry but with the whole business model (and the managements that are responsible for this state of affairs)

Why is Adoboli alone facing the music?

Seeing Kweko Adoboli as the lonely accused in the Courtroom creates a certain amount of sympathy for the young man. It is easy for senior UBS staff to pin all blame for the billion dollar disaster on one person. This makes it easy to escape blame for a  management culture that allowed a completely insufficient risk control to exist. Senior managers were busy enough chasing profits at any price with a firm eye on the next bonus payment they expected to receive. But Risk Management should mean that fail-safe procedures are in place - if necessary in triplicate - that make it impossible for any single person to play the markets the way Adoboli is accused of having done. Senior managers have been fired (with or without a 'golden handshake' as farewell present?) but should there not be other people facing justice in the courtroom? Oswald Gruebel may have wished for a more glorious end to his career, but he will certainly not feel any pain in his pocket.

Do not play any tax games with compensation

News that another major bank has been entangled in a tax dispute with the British tax authorities as it has been caught with a tax avoidance scheme where (favoured) staff were paid in an offshore tax haven illustrates that even prominent firms have not yet learned the lesson that their corporate governance must be beyond any reproach. Even more so when the same firms often are the custodians for large amounts of money that are entrusted to them by institutional and private investors who expect that the highest ethical business standards are observed. Very often the rank-and-file staff lower down the pecking order is not benefiting from such generous 'tax advice' (often paid by the employer for the favoured 'high earners') and this creates a situation where the cleaning staff may well pay more taxes on their meagre incomes than the staff that receives multi-million bonuses.