Feeding time: Bankers bonuses and the need for Good Banking

I wanted to build on Colin Gruar's article yesterday and add some perspectives to the very topical subject of bankers bonsues, and what it says about the state of the banking industry.

I have added the widget of the gold fish. Like goldfish we seem to swim around, respond to the immediate stimuli and retain only about a seconds worth of memory. Haven't we been here before?

This tendency to forget is not new. If you watch the movie Smartest Guys in the Room about the Enron collapse of 2003, you will see Chuck Prince in denial to a Congressional hearing. This is the same Chuck Prince that led to the fall of THE biggest banking brand, Citigroup.

Just yesterday, the Economist dropped on my desk arguing that a second bubble had emerged. Yet, news from Wall Street and the City of London suggests that bumper bonuses are in the offing due to the massive year-on-year rise in profits. It might well be the case therefore that bankers will receive inflated bonuses on the back of growing assets temporarily, which will simply crash again mid year as we enter a second dip.

It is not banker bashing to suggest that this is wrong. Ultimately, it means that the bonus mechanisms inherent in many bank bonus plans ratchet up, but not down, resulting in a too greater share of the economic pie being given upfront to bankers.

The result is not just public anger, but the real risk that the Financial Centers of Europe end up being regulated by Belgian socialists. If bankers behave like goldfish there is only so much governments can do to prevent this, given the complex political trade offs going on in Brussels.

Banking by nature is a risk taking activity that has to allow large scope for entrepreneurship. Regulation that turns banking into a utility will impoverish the whole of Europe, not just Frankfurt and London.

The answer lies in rediscovering the old ethics that underlay the growth and success of the financial centers from the thirteenth century onwards. In 1801, the London Stock Exchange adopted the motto, "My word is my bond". We might guffaw cynically today. City slickers might say, "Come off it, mate, you don't really expect us to believe that today".

Well, the answer is yes, we do.

As both a former head of Executive Compensation for the Hay Group in Asia, and as an Executive Coach, I have seen banking leaders increasingly opt out of their leadership responsibility to allocate bonuses fairly and ethically. Rather than making balanced judgments, banks adopted formula based schemes, linking bankers bonuses directly to short term indices, such as new business, fee income and net profit. Nothing can indicate more the lack of trust within the banking industry that its leaders were no longer trusted to make decisions.

Cynically, banks created a lot of HR bumph around bonuses, designed to create an impression that clients came first and their bank was committed to the public good. The evident disregard for these words in the actions of their leaders meant that no longer was a banker's word to be trusted.

The key point I want to make however, is that we need good banking. Banking is how wealth is created. I recall some years ago at a function in the City of London sitting next to an bond trader. I asked him how his day had been. He replied, "Not good really, I just dropped $5 million. Never-mind, tomorrow's another day". We clinked glasses and toasted to success. This is banking.

Bankers who have protected their clients assets and found new sources of growth need to be reworded handsomely. Bankers who simply grow with the market should receive a salary and no more. Bankers who fall behind the market need to have immediate cuts in their cash compensation. These performance indices should be measured on a rolling three year basis. 

Most banks simply don't do this. They prefer to manage performance by mass firings (often, after the market has crashed), leaving the rest to enjoy the pie. This creates a selfish, greed culture in which undermining your buddy from college becomes a rational act. At a macro level, it means partners of Goldman Sachs feast on the bones of Lehman brothers, while adding no value other than being the last man standing.

Back to Colin's article. Banking can only be recovered if leaders rediscover the morality inherent in banking. Short term concerns about loss of talent are misplaced. Banks that act on sound values will attract customers and talent in the short term, mid-term and long term.

Within a bank and across the banking industry, these winners and losers should broadly balance out to ensure the banking industry does not consume a too greater share of the economic goods.

Here's my view of how to do this:

• Banking leaders demonstrate they act ethically when confronted difficult choices. For example, telling the truth would be a good start.
  
• Banks do away with short term, profit-linked bonuses 
• Banking leaders become individually accountable for making bonus decisions based upon good economic information and in accordance with core banking values
• The overall pattern of variation in banker's bonus pay becomes clear to the public
  
• Promotion within banks weight heavily towards those who have shown they can make good ethical choices
• The Boards of banks are strengthened by well paid, expert and independent non-executive Directors with the power to report independently to shareholders and regulatory to governance risks within the bank.

There is much more to be done.  But these things would be a good start and help re-build a banking industry to be proud of.