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There is no subject more guaranteed to energise normally taciturn employees than one of the last remaining taboos - the size of people’s remuneration packages. You only need to open the business pages at this time of year, and a whole set of telephone numbers come tumbling out. An average payout of £233,000 for the investment bankers at JP Morgan. A £9.7bn pot for the tanned types at Goldman Sachs. The £2m goodbye wave for Eric Daniels at Lloyds has given cause for many to raise their eyebrows given the purchase of HBOS, including its disastrous property loan book.
If you ask City executives to justify such huge bonuses, they have two reasons for their mammoth handouts. First, bonuses spur on staff to perform better, which in the end is better for both the business and the wider economy. The second defence is the one given by the boss of Barclays, Bob Diamond, to MPs on the Treasury select committee last week. Unless banking chiefs paid out these vast sums, he said, they would lose their best and brightest and oh-so-rare employees (Bob, by the way, is himself in line for an £8m bonus).
Having conducted some research into the theory behind bonuses and whether they work to motivate us, there is something in what bankers say – they do. However, the evidence suggests that where bonuses would be most useful is not in finance – but in jobs such as fruit picking and working on supermarket checkouts. The people who should be getting bonuses aren’t in the glass and steel office blocks of Canary Wharf.
Take the financiers’ first line of defence, about the relationship between pay, targets and performance. In 2005, the Federal Reserve Bank of Boston published a piece of research called Large Stakes and Big Mistakes, in which a team of behavioural economists reported on experiments they had conducted with American undergraduates. The students were offered money to tap a keyboard as fast as they possibly could and also to add up some numbers. When it came to the simple chore of hitting computer keys, bonuses worked a treat: the more cash on offer, the faster the undergraduates tapped. On the more complex task of doing maths, however, incentives served to worsen performance. “Tasks that involve only effort are likely to benefit from increased incentives,” wrote the economists. “While for tasks that include an element of thinking, there seems to be a level of incentive beyond which further increases can have detrimental effects on performance”.
It seems bonuses can spur workers on to do basic mechanical tasks faster and better – clearing a field of fruit before it goes rotten, say, or scanning in multi-packs of Andrex in busy supermarkets. But on more complex tasks paying bonuses is counter-productive. The same results have been shown in other studies. When investment bankers argue that their work is so complex they need bonuses, they are contradicting the research. The history of the past few years shows that bonuses drove an entire industry to gamble – with disastrous consequences.
Now for the other argument, that financial institutions need incentives to keep these superstars. That theory is neatly quashed by Boris Groysberg in his recent book, Chasing Stars. “Moving employer on Wall Street is no big deal. You hand in your BlackBerry, pick up your coat, cross the street and in 45 seconds you can be back in business. But what you leave behind is your colleagues, your bosses, your knowledge of how your company functions – in other words, all the institutional and collective factors that made you a success, but which usually get forgotten in the acclaim for individual achievement.”
The mirage of talent is how management writer David Bolchover labels this. He argues that those skills aren’t so rare nowadays when China and India are churning out tens of thousands of maths and engineering graduates.
My own view on this is that is all makes perfect sense. In fact, bonuses in a complex organisation like a bank can often serve to generate self-motivated behaviours which negatively affect the culture of the business, and utterly fail to serve the customer. I’d be interested in your views on this research - do you think bonuses spur the banking fraternity on to deliver significant performance improvements? Or we simply jealous that we’re not one of the favoured few with a bonus in six figures?
Liz Sinclair is a Key Account Director at Interim Partners.
Even though the Irish banking crisis began in 2008 it is still having major repercussions for the financial services sector. Bank of Ireland’s share price plunged 20% yesterday and Allied Irish was down 15%. The property crash that resulted in a 50 to 60% fall in house prices has left the banks with enormous bad debts and the subsequent £39 billion bailout by the Irish government has crippled the national finances, the budget deficit will be 32% of GDP this year.
Ireland has been left with no option but to ask the EU for assistance which could add up to £77bn. This uncertainly is now spilling over into the world’s financial markets and European and Asian shares are sharply down.
One thing is for sure, whether you are an interim looking for your next role or a provider looking to deliver assignments, we are all hoping for a speedy recovery to the financial services sector. So the key question is, what are the critical success factors that will lead to a recovery?
I canvassed opinion last week from Chris Plumbridge, an interim Finance Director of many years experience and his view was threefold:
- The availability of credit/liquidity. For example, in the retail mortgage sector the key constraint is the availability of funds to lend - not qualifying borrowers or properties;
- A stable and predictable regulatory regime. Understandably, in view of recent events, regulators are concerned about financial services institutions’ solvency and risk management (amongst other things). However, if the solvency regime is too stringent then it will constrain those institutions with money to lend and/or invest and slow the pace of recovery;
- Confidence. Investors - particularly retail investors - tend to invest at or near market peaks. Any sign of returning confidence and returns will attract investment out of defensive investments (For example, cash) and back into equities and other risk-based investments.
I would be very interested to hear and debate the views of interim managers within our network on what they think the critical success factors will be for the recovery of the financial services sector.
Andrew McIntee is a Director and Head of Financial Services at Interim Partners
I notice that the appointment of Bob Diamond as Group Chief Executive of Barclays has caused a large amount of uproar this week. Vince Cable has predictably waded in with his “casino banking” comments and Matthew Oakeshott, the Lib Dem treasury spokesman said “he’s a great gambler but has no experience of retail banking”. Ouch.
Few would understate the importance of Bob Diamond in transforming the small investment banking arm of Barclays, BZW, into the international giant that is now Barclays Capital.
For me, this raises a number of questions:
Is it fair to label one of the greatest bankers of his generation as a “gambler”?
Is it appropriate for the Government to criticise the board appointments of a public company that has not been part of a taxpayer bail out?
Are Barclays right to appoint an investment banker to run retail bank?
Your comments, as ever, would be appreciated.
Andrew McIntee is a Director and Head of Financial Services at Interim Partners
The UK housing market has exhibited signs of slowing growth in the past few days. Bank of England figures show that the number of mortgage approvals were just 160 higher in July than in June and only a little higher than the average for the previous 6 months. The National Housing Federation is also forecasting that house prices will fall by 3% next year.
Given that the real impact of the Government Spending Review scheduled for the 20th October has yet to bite into the economy, one can only wonder what effect a slowing housing market and rising unemployment will have on consumer confidence, particularly in the crucial run up to Christmas.
That said the banking sector in the UK posted encouraging half year results, Barclays reported increased profits to £3.95bn up from £2.75bn, HSBC’s profits more than doubled to $11.1bn and RBS returned to profitability to the tune of £1.14bn, good news for taxpayers who own 83% of the shares, although some of that profit was due to changes in accounting rules.
Most of the gains are due to far fewer loan impairment charges than in the previous couple of years and an increase in retail and commercial banking divisions. Contrasting with recent times the investment banking arms have struggled, Barcap for example saw its income fall by 38% compared with 2009.
In the US, banking profits are also on the up and lender profits have now reached pre-banking crisis levels owing to a fall in the rate of loan losses. The US banking market is polarised, however, with larger banks performing well but smaller banks still in the doldrums. The Chairman of the banking regulator, FDIC, said that almost 2 out of 3 banks are reporting better like for like figures.
As the old saying goes “what happens in America happens over here” so hopefully the worst is behind us and the sector can look forward to increased activity in 2011, despite the wider economic turmoil which is set to come out of the public sector.
Demand for interim managers in the financial services division at Interim Partners is very strong. We have just posted record results for July and August and appointed two new members to the team who will help expand the practice.
As always, I welcome comments and observations on the sector from interim managers in our network.
Andrew McIntee is a Director and Head of Financial Services at Interim Partners.
The question of retail banking charges on overdraft fees have been back on the agenda this week. Research for Panorama reveals that high street banks surveyed are charging as much as 167% interest on unauthorised overdrafts and an average of 32% interest on authorised overdrafts, despite advertised rates of around 19%.
Vince Cable, the Government’s Business Secretary and long term critic of the banking sector couldn’t resist a broadside. Mr Cable said: “When we talk about restructuring the banks what’s going to come out of this is a more competitive system where the customers are not ripped off.”
According to the Office of Fair Trading, in 2006, Britain’s banks earned £2.6bn in profit from penalty charges. Based on that fact it may appear that Vince Cable has a point, but given that to the general public current accounts are largely offered free of charge banks have to make money from somewhere. The alternative is monthly fees for all which would surely penalise those customers who run their accounts sensibly and therefore do incur penalty charges.
Vince Cable also made the point that the banking system is now even more concentrated than before the crisis leading to less choice which allows the banks to increase margins. It was however the former Prime Minister who waived competition laws to enable Lloyds to take over HBOS, thus putting Halifax, Lloyds, C&G, Scottish Widows and Bank of Scotland under the same roof.
The FSA are also putting significant pressure on banks to strengthen their balance sheets, something which can only be done if the banks continue to make good margins.
The question remains, are banks ripping off customers or do they represent a vital pillar of the economy trying to get back on its feet?
I would welcome your comments.
Andrew McIntee is Director, Financial Services at Interim Partners.
I am delighted to announce that the Financial Services practice has appointed Natalie Fennell as an Account Manager. Natalie will have special responsibility for delivering our preferred supplier agreement with Lloyds Banking Group, which includes brands such as Lloyds TSB, Halifax, Cheltenham & Gloucester, Scottish Widows, Clerical Medical and Bank of Scotland.
Given the amount of change being undertaken by the organisation and the subsequent demand for interim resources we have taken the decision to invest in our relationship with LBG. Natalie has an extensive track record of developing and delivering contract resourcing solutions within large organisations and will without doubt be a valuable addition to the team.
Clearly this represents a significant opportunity for Interim Partners to expand further into the financial services market and we would be delighted engage with interim managers who have experience within the sector.
Andrew McIntee is Director, Financial Services at Interim Partners.
With the most important and closest run general election for decades only a week away, one must assume that the UK’s 1.4 million contractors would have a significant voice now more than ever. Surely now is the time for lobbyists on behalf of contractors and interim managers to up the tempo against legislation such as IR35, which is widely viewed by the sector as nothing more than unnecessary bureaucracy.
In order to generate greater visibility on the issue, the Professional Contractors Group have taken large advertisements in the Times and the Sunday Times lobbying support for contractors to wage war on IR35 and taxation rules for small businesses.
The PCG has held a number of meetings with the major parties, however, in a letter to PCG Chairman Chris Bryce, the Shadow Business Minister, Mark Prisk MP has committed that “a Conservative Government would undertake a fundamental review of small business taxation matters, including IR35.”
The letter further went on to say ”… we want to deal with this problem comprehensively, in a way which provides us all with a lasting solution, not a short term fix.” The PCG state that the Conservatives would set IR35 as a priority for a newly established Office of Tax Simplification.
Regardless of who wins the election, given that contractors contribute £21bn to the economy, the new government would be wise not to ignore the voice of the sector and deliver a long term resolution to IR35
Andrew McIntee is a Director and Head of Financial Services Practice.
The implementation of Solvency II in 2012 will set new requirements within the insurance sector around eligible capital and introduce additional types of solvency capital.
Solvency II will undoubtedly have a significant impact on the shape of the global insurance market. Market consolidation and the restructuring of business operating models are widely expected.
Solvency II will require all insurers to develop new and improved modeling capabilities and integrate such models into core business processes. Currently being reviewed by many insurers are a range of legal entity structures and capital options for their underwriting platforms and holding entities.
What will differentiate the winners and the losers in the new regime will be those who can go beyond mere compliance and use this period of significant change to generate greater performance through increased efficiencies.
All of this adds up to a classic recipe for the use of specialist interim managers within the sector. Solvency II will cascade throughout insurance companies and elicit change in systems architecture, financial controls, risk framework development, Target Operating Model reviews and people strategy.
As with any new regulations, candidates with actual hands on experience of delivery are scarce at the moment therefore interim managers with expertise within the insurance sector will be best placed to take advantage of the demand. Individuals who gained expertise delivering Basel II within the banking sector in the recent past could also be well suited to Solvency II projects.
I would be particularly interested to hear from interim managers with the above experience and I hope that my predictions for the insurance sector prove accurate!
Andrew McIntee is a Director and Head of the Financial Services practice of Interim Partners.
Following on from my blog entry in the New Year which stated (optimistically!) that early indications of a busy year were strong, fortunately this has proven to be accurate and the interim market within financial services has returned robustly. Although I have been in the recruitment sector for 12 years I posted the best ever performance figures of my career in February.
Retail banking, life and pensions and general insurance are the primary markets leading the charge. I would be especially interested in referrals of interims with Business Analysis, Project Management, Solvency II and Risk experience.
I am responsible for delivering an ambitious business plan to expand the financial services practice this year. I am actively considering launching a new front in our Brightpool business focusing on the Compliance market to assist with issues such as complaints reviews and regulatory investigations. I have also made an offer to a highly experienced individual within Brightpool to help cope with existing demand for contractors from our own interim managers.
My wife gave birth to our third daughter, Rose Elizabeth, 5 weeks ago. It’s been 4 years since we had a last baby so I am currently relearning the art of functioning with sleep deprivation. I am spending a little more time working from our London office at the moment, both to spend valuable time with clients and to ensure I get a good nights sleep!
Andrew McIntee is a Director and Head of Financial Services.
I am delighted to announce that in recent weeks the Financial Services Practice at Interim Partners has been awarded a substantial contract with RSA to supply interim change professionals for the next 2 years.
RSA is a FTSE 100 insurance business with £6.5bn of annual premium income and they are implementing large scale transformation programmes during 2010. The contract commenced on 4th January and will focus on the supply of Business Analysts, Project Managers and Programme Managers. This contract award represents a major step forward for our company and hopefully a significant boost for the Change sector of the interim market which faced head winds during 2009.
We have also signed an agreement to become a preferred supplier of interim resources to Lloyds Banking Group. The size of the integration and disposal programme created in the merger between Lloyds and HBOS last year will undoubtedly be a catalyst for interim management demand. This agreement is also is effective from 4th January and will be a meaningful addition to our stable of leading financial services clients including Aviva, Prudential, Aegon, Bradford & Bingley, Bupa Insurance and Royal Liver.
December proved to be a very productive month and I placed 7 interim managers, 5 of which were in the week before Christmas. My team has picked up 5 new assignments in the first 3 working days of January so early indications are that by next Christmas we will deserve a well earned rest!
I would like to take this opportunity to wish all those within the Interim Partners’ network a very happy and prosperous new year.
Andrew McIntee is Head of the Financial Services Practice of Interim Partners.
