I’ll See You and I’ll Raise You


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expert perspective telescopeExpert Perspective by Grahall’s OmniMedia Editorial Board

In their July 16 Wall Street Journal article titled “Banks Ramp Up Pay Packages to Top Talent” authors Kate Kelly and Sara Schaefer Muñoz share that “Some strong banks such as Goldman Sachs Group Inc. are ramping up pay amid big profits. But some weaker banks buoyed by governments on both sides of the Atlantic also need to keep pay high enough to remain competitive, while avoiding the wrath of lawmakers.”

It might not just be lawmakers whose wrath the taxpayer owned banks’ will face over compensation policies.  Clearly “Main Street”  and the media has and will continue to weigh in heavily and angrily.  But it is really beside the point who gets upset.  It is more important what has and will happen and why. 

Companies face a significant and growing challenge.  We believe that turnover of top performers will soar when the economy recovers.  Basically executives are risk averse when it comes to their jobs and their pay (see the July 20, 2009 Wall Street Journal article by Jillian Mincer “Fewer Defer Bonus amid Job Concerns” discussing how are executives taking bonuses in cash rather than deferring them). 

For risk averse executives who work at TARP companies, basically their choices are:

1) Stay put, where compensation is capped and the future success of these companies remains in jeopardy.  Lots of risk here.

2) Stay put and accept a retention bonus, sure the retention bonus can help give an executive a sense of comfort but see #1 above. Lots of risk remains.

3) Move to a new place, assuming this is a non-TARP company, the compensation issue is eliminated and the risk is far lower.  

Interestingly, Kelly and Muñoz also mention in their article that “Government restrictions wouldn’t affect the pay of a new hire… in his first year, officials say. That is because employees must have been a member of the prior year’s top-100 list to be subject to the bonus curbs.”  But after the executive’s first year, see #1 and #2 above.

So risk adverse executives will most likely take option #3 when it is available.  And the fact that executives are risk averse and likely to leave if the opportunity presents itself is exactly why retention bonuses are becoming more prevalent.

Here is a little known secret from the compensation consulting community. The 90th percentile employee in a intellectual job can contribute 200% more than the average employee, but is only paid 40% more than the average person in that same job. Historically the company really wins big with high performers in terms the cos vs. benefit of their contribution. While this situation may be less prominent on Wall Street than on Main Street, it remains true for the financial services industry as well.  Companies gain significant competitive advantage when they recruit and retain those high performing, 90th percentile individuals.   Even in the rare cases where they have to pay at the 90th percentile to retain these people, the company is better off, since the value of the individual (at 200+%) is at least double the cost.

Retention bonuses also extend far down the ranks below the top-100.  Many of these retention bonuses are performance based but also have a “floor”.  As one of our Grahall consultants says: “retention bonuses are structured as “7 figures” for performance and “6 figures” for just breathing.”

And speaking of TARP companies, the hearings have begun to review the pay packages for the top executives.  Thirty individuals convene to review, questions and grill “C-Suite” executives at TARP companies about how the compensation programs are designed to address and manage risk. The reviewers have an important job.  Their investigations and decisions will certainly impact the companies, the executives in those companies, shareholders, and perhaps the financial services industry as a whole. So how were these highly influential individuals selected?  As we understand it, these positions were listed on a job board.  In the case of one individual, he was hired on the strength of his resume, no interview required. Only time will tell if these hearings result in any positive outcome. 

Grahall’s Michael Graham adds: You have to wonder if Goldman and others who just announced significant pay hikes are pulling the equivalent of a Ronald Regan cold war “star wars” on the Russians, hoping to spend their competitors into bankruptcy. It is clear that shareholders will not stand for very long  high incentives to attract and retain employees. There just isn’t anything left for shareholders, and then, pretty quickly there won’t be any shareholders. (Email Michael Graham at michael.graham@grahall.com).

Email Grahall’s Editorial Board Director at edie.kingston@grahall.com

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