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Sunday, 17 December 2017

Back to basics means curtains for the producers

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Anthony Peters

Anthony Peters is a strategist at SwissInvest

TALK ABOUT THE law of unintended consequences! When the banking crisis broke out and traders were telling their friends that they were portfolio managers, while salespeople just said that they worked in telesales and investment bankers became solutions managers, there was a great railing against the City, Wall Street and the bonus culture. Bonus taxes were introduced, maximum cash payouts became the norm and everyone got filled with copious quantities of deferred stock.

One of the most notable results of the authorities’ raid on bonuses was a significant upward adjustment in base salary levels in investment banking.

Although many bankers had long moaned about the meanness of base salaries – non-contributory pension payments were based on them, after all – the rapid rise in basic pay has had many of us wondering how long it would take for the new, higher pay scales to come home and bite bank bosses.

Through 2009 and into 2010, investment banks all seemed to be competing to offer the best levels of basic pay. All of a sudden, a managing director in London who couldn’t previously get much more than £150,000 was being offered £250,000 – by his existing employer – without even having to ask for it. Forget “total comp”, there was a new game in town.

BUT THOSE WHO know and understand the DNA of investment banks could see trouble brewing. Banks don’t mind paying their people well and, let’s face it, the golden decade saw some very average people getting paid well beyond what they were worth – in some cases beyond what even they thought they were worth. Nevertheless, the bonus was, in theory at least, a variable cost and allowed banks to avoid loading themselves up with fixed costs.

In fact, for more than a decade, most of us saw no change in our base salaries, which cumulatively and adjusted for inflation was tantamount to a nearly 50% pay cut. But we didn’t care – it was the total compensation package we were interested in.

That all changed in the financial crisis. By then many of us were on the outside and we watched the pay increases with horror as we tried to second-guess what would happen if business turned down again.

An MD with 15 years service and a six-month notice period becomes a very expensive commodity to fire.

In 2011, it has done so; even the power houses of Goldman Sachs and Morgan Stanley have demonstrated that they too don’t have a better recipe for boiling water; and revenues, especially those from the fixed income, currencies and commodities business have, for lack of a more subtle term, imploded. If they aren’t coining it in, who could? Time has come to cut costs.

First out the expensive guys? Wrong!

IT IS AN old truism that MDs are not really good value. They have “made it”, they lack the hunger of the younger vice-presidents and directors and would much rather rest on the laurels of their often slightly superannuated client books. Therefore, it would appear to be the obvious move to put some of these dinosaurs out to grass.

Sadly, however, the calculation no longer works. If their base is, for arguments’ sake £250,000, then an MD with 15 years service and a six-month notice period becomes a very expensive commodity to fire; too expensive in fact.

With all the budgetary pressures of a firm not making as much as it would like to, the cost of retrenching MDs becomes too high. The senior manager’s choice is not between the averagely performing senior and the hungry junior but becomes a selection based on how much redundancy cost can be afforded.  The “old dog” has become the human equivalent of the “too big to fail” institution.

In other words – hang on to your seat – the more you cost, the safer your job.

So it is that the middle-ranking top producers will suddenly and surprisingly find themselves in the firing line. Who cares for the future of the business? Who can afford to care for the future of the business? Top management doesn’t have time to worry about their bank’s customers and how they are served and serviced.

Promises of returns have been made to shareholders and if the best people have to be let go simply because they are cheaper to fire so that the results and the current dividends aren’t too badly affected, then that is what will be done.

Forget fighting for bonuses; fight for promotions and pay rises; they are the new insurance against joining the dole queue as banking begins its necessary and overdue “shrink to fit” process.

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