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.

Kerviel Case: Where has all the money gone?

In all the excitement about the huge losses made by Soc Gen's Monsieur Kerviel and the bank's management one thing never gets mentioned: someone out there has made a whopping big profit out of all of this. Futures in particular are the ultimate zero sum game and where there is a loss there always is a profit. This is no consolation for Societe Generale and its shareholders who are left holding the proverbial bag but it should calm the nerves of politicians, economists and other commentators. Economically not much has happened except that a substantial sum of money has passed hands. Society as a whole is not poorer as it would be if the same sum of money would have been spent building pyramids - or steel plants that turn out to be surplus to requirement once they are finished.

Northern Rock - two key questions that need to be answered

The first question - and it has hardly been receiving attention in all the discussions of the Northern Rock saga that we are aware of - is the question of how it can be that in a so-called 'democracy' emergency legislation can be passed where the executive and legislative branches of government are in collusion and decide to 'nationalize' private property. The emergency support that the German Government has just decided to give to IKB Deutsche Industriebank in Germany (thanks to an obliging taxpayer that has no say in these arbitrary spending decisions) is just a less blatant form of nationalisation (where private wealth is taken away from its rightful owners and spent by politicians to spend on their favored constituencies).

The second question is again an indictment of Government, more specifically the quasi-governmental agencies that masquerade as 'banks' and are more commonly known as 'Central' Banks. In recent months untold (literally) billions of confetti money have been spent by these curious 'banks' in providing liquidity to the World's Banking system. No one will deny that Northern Rock used the leeway that is given by banking regulations to an extent that could with some justice be described as imprudent. But this is no excuse to provide all other banks with liquidity but let this particular bank hang out to dry. This was the crucial decision (mistake?) taken by the authorities back last summer and that has to be the point of departure when assessing the correct compensation for the Northern Rock shareholders. It simply is not good enough to destroy a business first and then base compensation on the situation that has been created by one's actions.

Non-Dom Taxes - Nail in the Coffin for London's City?

Ill-conceived taxes were instrumental in the development of the Eurocurrency and bond markets during the late 1960s and early 1970s. First the American Government in its wisdom introduced the so-called Interest Equalisation Tax in 1963 in order to make it more expensive for non-US borrowers to access the US capital market. Then the Swiss authorities levied penal tax rates on transactions involving Eurobonds and other securities. As a consequence, most business involving international securities decamped to London during the 1970s. Now Gordon Brown has decided to make his own mark on the history of the Euromarkets by introducing a special levy on foreigners involved in the international capital markets. Not only is the per-capital levy of £30000 per person highly arbitrary and unfair but the detailed regulations introduced are so complicated and wide-ranging as to provide the proverbial straw that breaks the camel's back. The London City should take note that in the intervening years the authorities in Switzerland and the USA have learned a lesson or two and that financial institutions - once gone from the City of London - are unlikely ever to return again.

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 disasters 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.

To Quant or not to Quant?

Yesterday's Financial Times carried a polemical piece by Nassim Taleb. In it he derided the use of mathematical models and called the so-called Nobel Prize for Economics an absurdity.
While we ploughed our way through a fair share of mathematics in our undergraduate economic classes and found them pretty remote from reality, we would not go so far as to completely reject the role of mathematics in the financial markets. At that time it was a sign of stellar quant ability if a bond trader or salesman could calculate the yield to maturity on a bond without use of a calculator, but time has moved on.
The recent events in the credit markets, however, have demonstrated that at PhD in Maths cannot be a substitute for good judgement and that good character should still be the basis for a successful career and business.

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.

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.

Professionals should do well again in 2007

The larger firms have built their staff levels from a standing start (Goldman had 56 employees in 1978 in London, Morgan Stanley had not even opened an office) to a cast of thousands.This was an extraordinary period of expansion that has come to an end. At best, employment levels will stagnate at this high level and fluctuate slightly around it with the ebb and flow of business levels.Professionals should be relatively safe from the trend towards overseas outsourcing or automation. Individual employees, however, will be under pressure to perform and may be weeded out in favour of younger staff that is potentially cheaper and keen to move up the career ladder.

London vs. New York - A Tale of two Cities

We do not think that the ascendancy of London as a financial centre to rival - and even overtake - New York should surprise anyone. The issue of overregulation in the US may be a factor but sheer demographic realities make it difficult for New York to maintain its position as undisputed leader among financial centres. This position was a legacy of two world wars and now that Europe is not cut in half by the Iron Curtain London is the natural financial centre for a region with a population of 600 million inhabitants. London is also geographically much closer to the Middle East and Africa and even Latin America is not that much farther away from London than from New York. London also offers a much more diverse workforce than New York as it is close to a multitude of different countries whose languages are regularly needed to conduct business effectively around the world.