ALMOST Unanimously?!

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expert perspective telescopeExpert Perspective by Grahall’s Robert Cirkiel

In an article published in the Wall Street Journal on March 30, 2009, Survey Finds Banks Aware of Pay Flaws author Stephen Fidler notes that “Banks almost unanimously agree that their compensation packages contributed to the global financial crisis but still are struggling to correct some of the flaws in their pay structures, according to a survey of financial institutions due for publication Monday.”   We are glad that ALMOST all these folks have caught up with the rest of the world.

So how did this sorry situation develop?  Lets start with a look at business structure of banks.  Banking is a very functional process because it is highly regulated and highly precise.  When you withdraw your $127.15 you expect to get $127.15, not $127.14 or $127.16. No whimsy here! To ensure the precision, everybody has a specific job to do in a very “siloed” way. Jobs are not really interchangeable and longevity matters. When compared with other industries, in banks we find:

  • Pay tends to increase with longevity.
  • Pay mix tends to include retention enticers such as pension plans and retiree medical plans. 
  • Pay messages tend to reinforce a mistake free environment where innovation is less important than getting it right. If other silos blow it, you still get your bonus.

So, folks in one division who achieve their goals can get substantial payments even if the overall organization is in deep trouble and shareholders are losing billions. Does this make sense?  Maybe not on the surface, but it’s not that simple.  Functional, siloed environments have their place and banks may be one of those places.  Manufacturing too is siloed.  Should an assembly line worker who exceeds all goals and is the most productive in the company be “punished” (that’s the message whether you like it or not) because the sales department didn’t do its job? 

Siloed reward programs keep people focused on “their” job, keep “finger pointing” to a minimum, and engender a deep and narrow career path.  In a siloed organization, the extent that an individual believes that certain behaviors will be directly rewarded, the more likely they are to focus on those behaviors. The problem with this structure is when overall organizational performance falls below a reasonable floor.  I’ve seen situations where an organization has lost money yet virtually everyone has “done their job”.  In this case, obviously the business model was deeply flawed or the rewards weren’t linked to the business strategy.   The resolution?  Reward those who did their job as punishment to those who didn’t.

How could it be that all the banks, all around the world (well, ALMOST all) agree that their compensation programs were so flawed that they all contributed to the economic crisis? The answer there is frustratingly simple, an absence of leadership coupled with a tradition of “following the pack” resulted in pay structures that were nearly identical in every single company in the industry. For many years, boards have relied on compensation consultants who bring the same old benchmarking data to every discussion and answer the single question: “How much”. Yes, it’s important to know the competitiveness of the pay — the “how much” — and how that relates to other companies in your industry, but that is only one piece of the complex puzzle, and, as we have seen it is clearly not the one to rely on. Yes, we agree that it is a difficult task to design a rewards program that addresses not just what to pay, but in what forms and with what messages. We call this the 3-M: Money – that’s the “how much”, Mix – that’s the “forms” both financial and non-financial; and Messages – that looks to see what the Money and the Mix is telling folks to do. Is it telling folks to take excessive risk, or to think only short term like “the new standard” of banking pay practices have done. That kind of approach is what landed us in the current economic situation. So clearly, just because it is what everyone else is doing doesn’t make it right. And perhaps more important, if a company’s rewards practices are nearly identical with everybody else, it is probably not aligned with the company’s own business strategy.

But we are avoiding the proverbial 500 lb gorilla, so let’s just say it: If taxpayers hadn’t bailed out these sorry banks, the losses of one division would have cratered the gains of the others.   No bonus, not even any pay, and Chapter 11.  The political situation is what makes this different now, and the fact that public money (generally from less wealthy taxpayers) is flowing to the executives who helped drive the company into the ground in the first place, and that is making people furious.   It’s like giving a panhandler $1 for a cup of coffee and watching them buy booze with it.

The compensation structures were full of holes, but until it started raining nobody – not boards, not executives and certainly not their consultants could, or would, see them. It’s like carrying around an old umbrella in case it rains – if you wait until the weather turns to see if it is in working order, it’s too late and you very likely might get wet.

But banks aren’t the only ones where compensation practices don’t align with business strategies.  Grahall Partners’ recent cross industry research study on Total Rewards Strategy Alignment [LINK TO ABSTRACT FOR TRS ALIGNMENT STUDY] found that there is disappointingly low level of linkage between reward strategy and business and people strategies. In fact only 35% of respondents indicated that their total rewards strategy significantly supported their Business Strategy; and only 31% of respondents indicated that their total rewards strategy significantly supported their People Strategy. Two-thirds of respondents pay folks in a manner inconsistent with business or people strategy.

There is work to be done, and for the banks and other financial services industries that work needs to be done in the pouring rain under the klieg lights of media, government and public attention. It’s a new landscape and there will always be unforeseen conditions.  Perhaps one lesson learned from the downturn is that modeling scenarios under good, bad and really ugly situations is critical to avoiding problems. Other industries should take note and start a careful examination of the pay practices. You never know when the weather might turn ugly. Email Robert Cirkiel at robert.cirkiel@grahall.com


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  • This is very complicated stuff and its easy to take pot shots. Some bill passed in the house stating that exec comp had to be reasonable but the house is going to leave that definition up to Geithner! Now if we use a public company analog, the shareholders don’t actually get direct say… though they may soon. The govt has effectively enacted a "say on pay" program. Critics who say the govt shouldn’t get involved may be right, but as “owners” they have every right to do so – but they may just screw it up. In one respect, this is no different than getting a secondary infusion of capital from a private financier. My experience suggests that the financier not only they wants to know how you are going to use the money (in fact if there is a private placement memorandum, there is a “Use of Proceeds” section that will get very specific about how funds will be used), but also one of the first things they’ll do is to lock down the use and cordon off compensation. Another interesting point is that Ace is testifying in Congress. He says the bailout of AIG has failed and that a new plan is needed, and now there is criticism of the fact that billions were payed to European banks who had risk at AIG – but of course, that was the whole point – to avoid a systemic trauma…

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