Tuesday, September 16, 2008

How bankers get paid

Watched this on BBC - HSBC Chairman Stephen Green talking on how bankers' compensation structure is one of the reasons of the recent meltdown & something that needs to change: "I think it is important and will become much more the focus of attention to ensure that remuneration schemes operate in a way that is lined up with the long term interests of the owners of the business. There has been far too much focus on payments that are very short term focused, people who pick up the tab for short term profits, without having to bear the costs of long term impairments."

While I agree whole heartedly with Green -- (in all banks, performance-bonuses are based on how much revenue you generate in the previous year/ quarter/ month) -- I also realise that this "reform" is attractive only in theory. For the simple reason that banking, like any other business, is a matter of demand & supply. When the going is good, the shareholders & owners of the business want to see quick growth; they don't want to see their money sit idle in a risk-averse but slow-growing bank; they want to see quarter-over-quarter returns. And there will be demand for professionals who can deliver exactly that.


Satyajit said...

Pls name 1 industry that judges it people on long term achievements? at the end of the day everyone works for money. if you dont see it over the next hill you wont work there anymore. its like saying "i will take care of all your expenses for the month, all, but you dont get cash in hand". will pay you a lump sum at the end of 5 yrs. will you continue working there?
ESOPs are somewhat bordering on what you say but short term in-hand dinero is what counts.

Radha said...

True. Most of the Lehmans senior management had a lot riding on their stock options. But just shows that the management was only doing what the shareholders 'expected' them to do in the up-market.

666 said...

i believe that bankers remuneration in general (forget short term or long term or ESOP) should be rationalized specially for markets like the UAE. I have consulted to leading banks there and my god... the skill level versus the pay is something which is outrageous.

I dont know how or why should it be rationalized. If they pay more.. great .. Any thoughts?

Radha said...

I guess its just demand & supply. Besides, the banker would be generating more revenue for the bank than what he/she costs the bank.

Nilesh said...

Some services, of course they are a business, require certain amount of unwavering principles. I totally agree with all the general feelings being expressed worldwide. Its all about greed. No amount of economic bull$hit can cover up for risking zillions of $ from your investors in debts doled out to less-than-worthy.

Radha said...

I agree completely. Banking is more than just a business, its the backbone of your entire economy. Yet, I dont see the alternative.