Banks should learn to say “Just Go”

By Hugo Dixon
September 24, 2012

Shortly after last year’s bonus round I was having lunch with the boss of an investment firm. He told me how he heard a handful of staff had been grumbling about what, by most people’s standards, were still extraordinary pay packages. He called them into his office and told them that, since they were unhappy, they should “Just Go”.

Most of them packed their things and left the firm. But the next day one came back and said he had been misunderstood. My interlocutor said he hadn’t misunderstood him at all. The employee clearly felt he was worth more than he was paid. He should take his luck and go elsewhere as he clearly didn’t have his heart in his current job. He should “Just Go”. And he duly did.

These words “Just Go” stuck in my mind because financial services bosses use them far too rarely. My lunch companion was perhaps an exception because his family is a big shareholder in his firm. Most other bosses are stewards for shareholders – and normally not terribly good stewards at that.

Of course, banking and investment bosses do have some equity in their firms but typically they don’t act like owners. They want to get paid a huge amount themselves. They also want to be surrounded by a phalanx of fawning minions who tell them they are masters of the universe. That boosts their egos. The best way of achieving that is to pay their minions millions, even if it costs the shareholders.

During the bubble years, pay in the financial services industry went through the roof. It wasn’t just for the stars either. Fairly ordinary middle-ranking bankers raked it in. Even after the bubble burst, pay has taken a long time to come down. The 2007 bonus round was a record. Although pay was reined in after Lehman Brothers went bust in 2008, it rebounded the following year.

More recently, especially in Europe, bankers have hit relatively hard times. Compensation is being cut and banks such as Deutsche Bank have said they will do more. But returns to shareholders are still miserable. What’s more, as the economic situation in much of the world remains challenging, the general public is resentful towards an industry that played a role in creating the current mess and which has had to be bailed out repeatedly with public funds.

Quite apart from infusions of capital into specific institutions, the whole market has been buoyed by massive injections of cheap money by central banks across the world – whether it is round after round of quantitative easing in America, Japan and the UK or the European Central Bank’s ingenious support operations.

The endless stream of scandals – money laundering, mis-selling of financial services, rogue trading and attempted manipulation of interests rates – has further sullied an industry comprising institutions such as Barclays, Deutsche Bank, HSBC, JPMorgan, RBS and UBS.

On a more technical note, high pay reduces the earnings that banks can squirrel away to build up their capital buffers as a protection against future crises. Although regulators are pushing for higher capital ratios, this can be achieved either by increasing the amount of equity in a bank or by cutting its lending. If banks put too much emphasis on the latter route, the economy will be put under further pressure.

The coming bonus round represents a golden opportunity to reset compensation to a much lower new base. What is needed is not merely to cut pay in line with reduced revenue, but something more radical – a significant drop in the proportion of the revenue pot devoted to staff. Although the final figures won’t be set for several months, now is the time to start planning.

What’s more, this is not something that should be left entirely to managers. Given that there is an intense shareholder and public interest in curbing pay in financial services, investors and regulators should get involved. They should call in bank chairmen and tell them they expect them to take advantage of the current, uniquely favourable, climate.

Managers will undoubtedly say that they are already cracking down on compensation and that it is best not to move too rapidly otherwise key staff will jump ship. But if shareholders and regulators give the same broad message to all banks – even if it is not their role to give specific instructions – there will be less risk of such poaching. With pretty much the whole industry downsizing in response to weak market conditions, there isn’t going to be that much appetite among rivals to hire.

It is perhaps too much to hope bank bosses to think about the public interest. But they are mostly smart individuals who can see how the winds of change are blowing. They understand that it could be in their personal interest to get ahead of the curve. Some of those who didn’t seem able to adapt to the new Zeitgeist – such as former Barclays boss Bob Diamond – have been defenestrated.

Bankers will always be tempted to play their own version of the game of Monopoly one more time and see if they can pass Go and collect another $200 (add several noughts). And, even in the current climate, there will be many who complain if their pay is cut. But the message to them should be the same as that given by my lunch companion: “Just Go!”

5 comments

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It’s funny that they call it compensation, instead of takings. But of course, one cannot expect a bandit to be honest about it.

Posted by JoeOvercoat | Report as abusive

The banking & all financial institutions need a complete make-over. Their blatant unethical, corrupt & criminal ways of doing business is destructive to our economy & society. Enough is enough.

Posted by EthicsIntl | Report as abusive

So, lets follow this logic through. Financial services industries reduce the salaries of their employees across the board, especially the bonus aspect. Lets assume that the employees all decide to be sensible and stay and there is no disruption. What next – the unauthorised risk taking and bonus seeking behavior (greed, if you will) will magically stop because they are paid less? I sense your frustration and believe it is mostly valid but you are confusing responsible custodianship with bankers salaries and the two are only loosely linked at best. My view is that money loses it meaning when the people whose money it is are unknown to you as the banker. I think the solution is to break up the banks into smaller banks – one per city (or even smaller regions if appropriate), and they must be owned and run by citizens of that city. Let them be small and mostly self regulated, then irresponsable behavior will be curbed as they are part of the community rather than just treating money as a game with winners and losers.

Posted by BidnisMan | Report as abusive

YES!

@BidnisMan
Self regulation is an oxymoron. There is no such thing. So far as “owned and run by citizens”, what makes you think ‘the citizens’ are any less venal or open to self serving corruption? A cursory glance at corporate management compensation boards tells you all you need to know.

We had regulation in the USA, it was not perfect but mostly accomplished it’s purpose. Bought and paid for politicians repealed it. Lesson learned from this should be to make the regulatory agency apolitical with a mission to examine all proposed new financial instruments that will be public offerings. Separate community banking from investment banking and withhold FDIC protections from the gambling sector while requiring plain language disclosure to the punters.

Posted by HenriettaM | Report as abusive

Reward is a driver in entrepreneurial success. Do we deny Carnegie, Pullman, Bill Gates, Donald Trump, Richard Branson their finacial reward? As BidnisMan identifies where the employee has no personal relationship with the investor the sense of responsibility diminishes whilst the motivation to generate commission without enhancing real wealth generation increases. Can smaller banks support the multi-national corporations? Those same corporations, that by switching production (or profit centres) between countries may have more immediate financial influence than the respective governments. Should the accountancy profession accept some of the accountability? or is national legislation that needs immediate review. One thing is certain. Ask the one in two Spanish or Greek schoolleaver who have no job if they benefited from the global behaviour of the financial sector. Can we see global social stability increasing? Is it possible to increase mutal respect both in our contributions as ecconomic units and to our social culture?

Posted by jfw | Report as abusive