Expert Perspective from Grahall
In an April 26th 2009 article entitled “After Off Year, Wall Street Pay Is Bouncing Back“, reported Louise Story (journalist for The New York Times) writes “Workers at the largest financial institutions are on track to earn as much money this year as they did before the financial crisis began, because of the strong start of the year for bank profit.” Ms. Story bases her reporting on first quarter compensation expense disclosures for financial services institutions saying: “… compensation expense is the only publicly disclosed figure related to pay at the banks, and it is the best figure for calculating pay per worker.”
Well, she is correct in this last observation but it is misleading and possibly irresponsible to extrapolate the first quarter of 2009 reported compensation expense out for the entire year and conclude that: “If that pace continues all year, the money set aside for compensation suggests that workers at many banks will see their pay — much of it in bonuses — recover from the lows of last year.” Nevertheless, do not be surprised if this is exactly what happens.
Many one time events happened in the first quarter of this year that aren’t likely to continue through 2009: The rate at which banks borrow money from the federal government dropped to 0% but the rate at which banks loan out money held at 4-5%. That’s a huge spread, and all profit to the banks. At the same time there was significant pent up demand for borrowing, so the banks had no lack of customers. Under these conditions it as virtually impossible for bank NOT to make profit but it is also unlikely that these conditions will continue throughout 2009.
Bankers’ compensation may rise however even if the rest of 2009 isn’t has profitable. Over the past many months many banks have significantly reduced head count. Hopefully losing those were employees who were unproductive and businesses that under performed, leaving the “compensation pie” to be divvied up among fewer folks.
Disappointing as it may be, we don’t not see significant reform happening in the compensation structures at financial services firms. We don’t see more logic and business sense being employed in the decisions around base pay, incentives and other compensation components. Further we don’t; see the capacity, capability or commitment to change that would be required for reform to take hold. So it’s our gloomy opinion that financial services firms’ compensation programs will revert to their previous short term focused state. As one of Grahall’s consultants occasionally reminds us, never underestimate the power of greed.
“How could this be”, you might ask. “After seeing that it was, to a significant extent, compensation practices that led to this economic mess why doesn’t management and HR demand that these programs be changed?”
Well the simple answer is that it’s difficult. For management it’s difficult because it is their pay too that will be impacted (read that as “reduced”). Or possibly the consultants they are using are still providing advice using the same old short-term focus and compensation components. (You can’t expect to get a different result with the same structure.) For HR it is difficult because they are the face of change to employees and the ones who have to deliver the message. Compensation changes (read that as “compensation reductions”) are not messages most employees want to hear and HR takes the brunt of the anger and complaints.
So for those financial services firms with the guts to give it a try, they should consider a two-pronged approach. Really investigate their current compensation structure and make sure the programs are aligned with business strategy so that people are paid in a manner that promotes long-term business goals. Second consider implementing these programs with unbiased external support.
Grahall has the capability to help any organization address their compensation challenges. With consulting, training, research and highly qualified temporary help to bring about thoughtful, long lasting change that will help your company grow. Contact us for more information.