THE OUTSIDER: My fantasy compensation arrangement
Let's play fantasy investment banking. It's the end of the third quarter, you are the CEO of a major investment bank, your firm has just reported its results - unexpectedly strong results - and that delightfully obscure item, 'Compensation and Benefits', has $15 billion against it.
It's that time of year again, and despite the horrors of recent times, the outrage of the media, the anguish of the impoverished taxpayers, and the feigned indignation of the politicians who haven't yet been invited to join your advisory board, enough parts of your firm have done well that you now have the dreadful task of deciding who gets to keep all that money.
Some parts of the firm have done extremely well, not least on the back of all that wonderful taxpayers' money sloshing round the system from the world's central banks. As a result it's an awfully big cake to cut. How would you do it?
Naturally the practice varies from firm to firm, but in the past in many firms the divisional heads would arm-wrestle about their relative contributions/importance to the firm, take what they could and then conduct similar exercises with their direct reports, and so on down the food chain. The corporate centre would hold back a prudent reserve for unexpected explosions, in case they suddenly needed to love bomb or 'turn' a star who had been subverted by the dark side and announced after bonus that he would leave, and of course the corporate centre had to keep a substantial reserve for...well, for itself, actually. That's one of the secrets of good senior management - managing well for yourself.
This year may be different. This year the spotlight is firmly on the bonus process, there are calls for transparency and accountability, for aligning employee interests with shareholders, and for skewing rewards away from excessive risk takers to promote safer, higher quality revenue generating activity.
So what would I change?
1) Paper
All the best plans are simple, so here's my simple four point formula. First, if my firm had benefited at all from taxpayer support, either directly or indirectly, I'd pay this year's bonus in paper. That's right, all of it. People say a quarter of Lehman's stock was owned by employees, and that did not stop the firm going under, to which I respond that at least a quarter of the shareholders' pain was taken by people who might have had some chance of averting disaster.
2) Naming and shaming
Second, I'd publish at least the top two hundred bonuses, naming the individuals and their roles in the firm. If the press want to talk to them about what they've actually done all year, let them take the calls.
3) Nasty haircuts
Third, I'd take the revenues produced by businesses that used the firm's capital - prop trading and principal investment, for example - and give them a fifty per cent haircut for the purposes of the bonus apportionment as compared to advisory and agency business that requires no capital.
4) Love bomb risk managers
Fourth and last, I'd award ten per cent of the bonus pool to Risk Management, and announce that this would be a permanent arrangement within the firm. The only difference is that their bonus pool would always be one hundred per cent paper, and would vest over five years, not three.
If it sounds at first blush like Christmas come early for the bean counters, my guess is that all kinds of phenomenally bright, imaginative, hard working people would want to be risk managers at my firm - and we'd be the better for it.
The problem with fantasy investment banking is that it never happens in real life. So expect a version of Back to the Future, with risk takers, prop traders, physically imposing men with large verbal presences (booming voices to you and me), managers who never meet clients and super-managers who never meet anyone getting monster pay-outs and only minimal lip service being paid to the outside world.
Lessons? Humility? Prudence and caution? Yeah, right.
David Charters' latest book, 'Where Egos Dare', is published by Elliott and Thompson, price 6.99.
