What Does A Public Servant With A Big Pension Know About The City ?
last updated: 3 May 2008
Here's the latest missive from our 'Highly Placed Professional'.
'I believe there's a certain similarity between the lives of financial markets professionals and footballers. Ok, we may not all be as fit or photogenic, but we do live a precarious life where results matter. And when I hear Mervyn King (Governor of The Bank of England) criticising the City culture, my first City-style reaction is to ask: 'What does he know ?'. After all, he's just a public sector worker with a fat pension pot and great job security.
However, where I do agree with Mervyn King is when he refers to the bonus culture as causing bad and risky practises. I am sure there are plenty of City folk who, when they get the chance, seek to milk the system for as much as they can. They just want to make a fast buck. Let's face it, the last decade has encouraged a culture where greed is good. And hedge fund managers, structured CDO arrangers, sales and trading staff have all benefited from the lashings of cheap liquidity.
But would traders at investment banks take such risks (and play such games) if any losses they sustained came out of their pay ? No sirree, bob, they wouldn't ! And is such an arrangement possible ? Yes sir, absolutely - and I'm here to tell you how.
In the world of commission sales and broking there is a not very well known phenomenon known as 'hold back'. And this means that for every quarter or month of your 'draw (what you get paid based on your commission rates) your employer has the right to 'hold back' a certain percentage of that amount. And a hold back can kick in because of your (lack of) teamwork, poor attitude or the general success (or lack of it) of your firm.You get the picture.
Now what large investment banks could easily do is to introduce compensation procedures that effectively 'hold back' a sliding scale of an employee's bonus. So, if you are the superstar CDO guy on a promise of several million quid and you are betting the ranch ahead of bonus time, maybe you would think twice if there was a cooling off period before you got paid out your full 'entitlement'.
For CEOs of public companies, there's often a connection between their compensation and the share price or performance of their firm as a whole. That's not the case with senior traders who operate in public companies in the financial markets. For some reason the City has got into this short term bonus trap, which is encouraging bad and risky practises. There's no doubt that banks' shareholders deserve a far greater degree of control on compensation. 'Hold back' might well be the answer'.
However, where I do agree with Mervyn King is when he refers to the bonus culture as causing bad and risky practises. I am sure there are plenty of City folk who, when they get the chance, seek to milk the system for as much as they can. They just want to make a fast buck. Let's face it, the last decade has encouraged a culture where greed is good. And hedge fund managers, structured CDO arrangers, sales and trading staff have all benefited from the lashings of cheap liquidity.
But would traders at investment banks take such risks (and play such games) if any losses they sustained came out of their pay ? No sirree, bob, they wouldn't ! And is such an arrangement possible ? Yes sir, absolutely - and I'm here to tell you how.
In the world of commission sales and broking there is a not very well known phenomenon known as 'hold back'. And this means that for every quarter or month of your 'draw (what you get paid based on your commission rates) your employer has the right to 'hold back' a certain percentage of that amount. And a hold back can kick in because of your (lack of) teamwork, poor attitude or the general success (or lack of it) of your firm.You get the picture.
Now what large investment banks could easily do is to introduce compensation procedures that effectively 'hold back' a sliding scale of an employee's bonus. So, if you are the superstar CDO guy on a promise of several million quid and you are betting the ranch ahead of bonus time, maybe you would think twice if there was a cooling off period before you got paid out your full 'entitlement'.
For CEOs of public companies, there's often a connection between their compensation and the share price or performance of their firm as a whole. That's not the case with senior traders who operate in public companies in the financial markets. For some reason the City has got into this short term bonus trap, which is encouraging bad and risky practises. There's no doubt that banks' shareholders deserve a far greater degree of control on compensation. 'Hold back' might well be the answer'.