City workers see colleagues as overpaid

This poll of 515 City of London workers confirms our observation that many financial organisations suffer from the effect of an upwards-only ratcheting of compensation levels. As everyone sits in the same boat - from the chief executives down - and setting pay levels means spending other people's money (shareholders in most cases) no one has a real interest to avoid paying more than is necessary to get the job done. The same effect is at work in the public sector where taxpayers are footing the bill for any pay largess. This merry situation (for those benefiting) carries on until the gravy train hits the bumpers: a downturn in business (or tax revenues) makes cuts in pay unavoidable. Responsible Managements are looking to keep compensation levels under control at all times not only because that is what any cautious business person should do in any case, it is also the right thing to do in order to avoid an irresponsible hire-and-fire culture (where those at the top usually are spared any pain and even pensioned off with golden handshakes and gold-plated pension schemes).

Bonus season advice: less haggling, more transparency

Transparency is urgently required with respect to 'bonus' payments. To a large extent these are allocated on an arbitrary basis, after much political haggling. Even when a bonus is based on rational and quantitative factors it cannot be free from suspicion. The amount of business a trader, salesperson or investment banker can achieve is to a large extent dependent on what markets/customers he has been allocated and how active these were during the bonus period. Bonus payments should to a large extend be based on the overall performance of a business otherwise the internal climate in most banks and other financial institutions will be dominated by constant  internal backbiting - no wonder firms go so far as to prevent employees from openly discussing their compensation arrangements. Senior management in any case should only receive the company-wide bonus and as such give a good example of moral leadership. Is this expecting too much?

How to prepare for slowdown in investment banking

Predictions of a decline of 16 percent in global investment banking revenues will pose a serious challenge for investment banks and securities dealers. Senior management is still trying to get a handle on all the regulatory changes they are hit with (and no end is in sight) and global markets in equities, commodities and bonds may be at or close to a peak. So the outlook is not rosy as declining markets usually also lead to a decline in market activity. One thing is clear: a stop-and-go management style in all likelihood will fail, hire-and-fire policies have been tried numerous times over the past 20 to 30 years and done nothing but demotivate and demoralise organisations (many of which have sadly disappeared from the industry). Managements are called to get away from 'macro-management' (lots of flip charts, off-site meetings, management consultants) and buckle down to manage the everyday aspects of their businesses, nurture staff - and above all manage the often inflated expectations regarding compensation that their employees might still garner.

Barclays: Protium deal worries shareholders

A look at the longer-term performance of the shares of some of the leading 'universal' banks confirms that shareholders have largely been left out of the party when it comes to sharing the wealth generated by the explosive growth of financial markets during the past two decades. So it should not be a surprise that more than one eyebrow is raised about the cosy deal that was struck between Barclays Bank and a number of its employees when $12.3 billion of toxic assets were sold to the Protium off-balance sheet vehicle in September 2009. It is not obvious why this transaction was necessary as the amount is quite insignificant compared to the Bank's total balance sheet. As is often the case when banks dispose of unwanted assets one has to ask why outside parties should get the upside. Surely the price of any such deal reflects what should be a realistic market price. Why would a bank - once it has accepted market reality - not stick to an asset that has been marked down to a new - and more attractive - price level? The only explanation we can come up with is bureaucratic inertia or intellectual lazyness thus opening an opportunity for outsiders with an eye for value

Tax burden in UK becomes problematic

A simple calculation in the sports section of a British newspaper came to the conclusion that a football player who would move to England on a total compensation of Euro 3 million would take home only around half that amount after the deduction of all taxes. In Switzerland his take-home pay would be nearly 2.4 million. Obviously this also has clear implications for Britain's standing as a global financial centre. With discrepancies as large as this the decline in London's relative attractiveness - especially for foreign professionals - becomes evident.

Credit Suisse Compensation Plan - Incentive or Disincentive?

While the new compensation structure that has just been announced may at first sight appear to be a step in the right direction it raises a number of questions: relying on the return on equity may be an incentive to increase leverage (and risk) in order to achieve a superior ROE. Making payouts over a number of years could lead to employees just marking time in order to cash in the awards. Depressed share prices and/or a low return on equity may punish hard-working employees that have no influence over either of these two yardsticks. At the same time top management is free to award itself levels of compensation that are high enough to shelter them from the negative fall-out from these two factors, thus creating an unhealthy 'them and us' atmosphere that is not conducive of good team-work.
One unintended effect of complicated and onerous compensation structures dreamt up by the big investment banks may well be that smaller competitors will become a more attractive employer. Younger employees in particular will not be able to spend these 'awards' to support a young and growing family when you need cash for housing, education and other pressing needs.

Open letter to members of the UK Treasury Select Committee

With reference to today's hearing I would like to point out that compensation for Bankers cannot be seen in isolation. Pay for staff in other sectors of the financial services industry - especially in the so-called 'Private' Equity business as well as in Hedge Funds - exerts a strong influence on pay levels in (investment) banking and the securities business. In addition, the problem of spiralling compensation for (top) executives in general industry and business is far from being resolved and also influences the general atmosphere with respect to control (or lack of control) of senior executive pay.

Deutsche Bank: rated most exposed by Japanese Regulator

While Deutsche Bank has performed admirably (at least on a comparative basis) during the financial Crash we kept being concerned about the slender margin of safety that is provided by the equity capital basis. DB may be less exposed to sovereign loans in the Eurozone and corporate loans may also be a lower part of its portfolio than in other institutions but that means that the bank is more exposed to financial assets and counter party credits. And the purchase of supposedly 'safe' businesses such as Deutsche Postbank and Oppenheim are by no means guaranteed to provide the high returns that management continues to aim for. News that Deutsche Bank is the lucky (?) owner of the most recent addition to the Las Vegas hotel scene does little to inspire confidence in the bank's risk management skills. Maybe the bank should pay its bonuses in the form of free hotel vouchers until the full extent of its exposure has been recouped.

No improvement in pay practices at banks - study

An study commissioned by the Council of Institutional Investors comes to the conclusion that changes to pay practices at major banks in the USA have lead to a deterioration rather than the intended improvement in incentives.

Staff Performance Reviews under Fire

A recent article in the Wall Street Journal takes aim at staff performance reviews. Temple Associates has long argued that the present performance review system is a ritual and platform for political power plays - especially in large, bureaucratic organisations. In addition, the secretive and arbitrary way that bonuses are awarded does little to alleviate this problem. While well-intentioned, making awards too dependent on subjective opinions (even worse on a 360 degree basis) would often turn out to be ludicrously discriminative if it would be brought out into the open - or even subjected to legal test. While maligned by regulators making performance-based pay dependent on numbers would be a more objective and less controversial way of establishing fairness. In addition, company-wide bonus schemes on an equal percentage basis could be administered for all employees. This would allow to incentivise those employees who work in areas where performance cannot be assessed based on numbers alone.

Investment Banking Jobs in Danger?

When the prominent banking analyst Meredith Whitney predicts substantial job cuts in the investment banking industry it pays to listen. After all, in 2007 she had correctly predicted that banks would be under severe pressure when she highlighted that Citigroup was under capitalized. As we at Temple Associates work as business as well as recruitment consultants for financial services firms we look at this chilling news from two angles. Naturally we were pleased with the brisk demand for staff that we have seen during the past 6 - 12 months. As business advisers, however,  we were always sceptical about firms that hired staff 'by the dozen' and tried to expand at breakneck speed. Many of the worst perpetrators are no longer with us as their businesses lacked the cohesive culture that would have allowed them to navigate the dry patches that any investment banking business invariably goes through from time to time. More often than not the salaries that were handed out in order to entice experienced professionals to join were higher than necessary and burdened the business with excessive fixed costs.

Masters of the Universe: Memento Mori!

The report of a senior derivatives trader jumping to his death after snorting cocaine should be a warning sign to the 'Masters of the Universe' that fill the ranks of banks and investing institutions. Given the extraordinary sums that many of them earn it is easy for them to lose touch with reality and believe in their superiority while at the same time forgetting that their good fortune is partly only  due to the confluence of several factors that contributed to the enormous increase in the profitability of the sector during the past 20 years. Just to put it in perspective: in the late 1970s the average equity stake of Goldman Sachs partner was still less than $ 1 million! But this did not hinder them to give an excellent professional service to their clients and to enjoy a social prestige on a par with the best professionals in medicine, law or any other profession.

Cash bonuses reduce risk - Study

Banking regulators all over the world think that it will help to reduce the risk of the banking system if they require a larger portion of total compensation to be paid in the form of equity. A recent study refutes this notion and tries to demonstrate that cash incentives are better suited to achieve a less risky banking system.

Pay rules: Bureaucratic nightmare in the making?

A report by PriceWaterhouse raises the spectre that new pay regulations could be applied to thousands of financial services firms. While the usual sham 'consultations' are conducted by the FSA we can confidently predict that by implementing new pay regulations beyond the small group of systemically important banks the dead hand of government would certainly make one mighty step towards killing the goose that lays the golden (tax) eggs in the City of London.
The average employee has zero influence on the overall risk profile and financial performance of his employer. A small circle of top managers is wholly responsible for the success of any enterprise in our system of corporate governance and any major delay in paying the much-needed pay-checks to staff further down the rung will only massively demotivate staff - and in many cases make them willing to consider a move to friendlier shores.

Bank Chief: Savers should lose in bank failure

We tend to agree with Peter Sands, chief executive of Standard Chartered, who said "that people with savings above any sum guaranteed by law — £50,000 in the UK — should be hit with other providers of capital if a bank fails" (The Times). But we think that a small - but important - group that was left out in the proposals were the senior executives of the banks. Having their money at stake did not stop senior management of Bear Stearns and Lehman to run their companies into the ground but in this post-crunch area it would certainly be a useful addition to the armoury of regulators if managements would have more at stake than just their jobs in case a bank should get into trouble. Given the vast amounts of bonuses, share options and other perks the compensation beyond a reasonable basic salary should be mandatorily vested during their employment and for a minimum period after they leave the bank.

Compensation vital cost factor

Over the years we have observed the rise and (more frequently) decline of many investment banks. As compensation is the key cost factor in the industry a sensible compensation structure is essential to achieving long-term success in the business. So when we read that the centuries-old private bank of Sal. Oppenheim had agreed to pay a former chief executive of Arcandor the princely sum of 4 million Euro a year for being an advisor (and on top of it give him a three-year contract) we were not surprised that the company had to be sold to Deutsche Bank. To throw around money like a drunken sailor can only end up with the business withering away due to lack of profitability. The situation at Lehman Brothers (and the old UBS before it was swallowed by Swiss Bank Corporation) was not dissimilar. The level of compensation was completely out of whack and while it may not have been the deciding factor in the demise of these enterprises it certainly was symptomatic for a general lack of good management and governance. Sensible recruiting is one - if not the - key factor in the success of a people business like investment banking - as well as in banking, securities brokerage and investment management. 

Deutsche Bank's Ackermann - danger of PR own goal

Deutsche Bank's Josef Ackermann fully deserves his 2009 compensation which puts him top-of-the-league for a DAX Chief Executive. It is still moderate compared with pay at some of his banking peers but it does not help his position in the global discussion about banking reform as 10 million Euro is still an amount that is way beyond salary levels that the public - and regulators, politicians and the media - feel comfortable with. To escape this dilemma it would be worthwhile to review the compensation structure of senior management - should it really be paid on the same basis as may be appropriate for a car salesman?

BNP Paribas Compensation: A Model to follow?

BNP states that is will reduce its compensation-to-income ratio to 27 per cent for FY 2009. In doing so management claims to address public (political) concerns over excessive pay. BNP certainly seems to navigate successfully through the twin challenges of keeping regulators sweet and running the business smoothly while competitors stumble over PR gaffes or management mistakes. However, we do have a sneaking suspicion that pressure on compensation levels in the large investment banks will contribute to a revival of smaller competitors that are not in the limelight and are less subject to regulatory fervor.

AIG: Compensation Policy in Disarray

News that Peter Hancock is joining AIG with a compensation package worth up to $ 7.5 mio per year drives another nail through the credibility of the Obama administrations attempts to control pay in the financial sector - and in particular in the companies dependent on government support.

Legality of Windfall taxes doubtful

We all wonder about the absurdity of some claims about discrimination, unfair treatment etc but one thing appears to be clear: the practice of putting windfall taxes on certain individuals just because they earn their living in a certain industry will no longer be meekly accepted now that deference to authority is no longer existent. We will watch with interest how the courts deal with law suits brought against discriminatory taxes on incomes earned by workers in the banking (and related?) industries. The Pre-Budget speech by Alistair Darling is certainly good news for one section of the UK population: the lawyers!

PS: Tax on bankers' bonus 'would infringe human rights' (The Times) You read it here first!