Sunday, October 12, 2008

Rewarding bankers, an idea from the past

In my consulting days I worked on a number of projects alongside management consultants and investment bankers. My role tended to be fairly minor, looking at the Capex and Opex part of a business plan to build a telecoms network, generally a mobile project. This gave me an insight into how they work and the issues they consider. As this was during and after the tech bubble it has some parallels to where we are now.

One thing to remember is that bankers are nothing more than salesmen, be they selling you a loan to go to college, buy a car or build a mobile network, they are selling you money. In this respect investment bankers are no different to a car salesman or any other salesman, if they don't sell they very quickly go hungry. And like the car salesman they tend to be rewarded with a percentage of the sale*. What is different is that the car salesman my make, say 1% of a £5,000 deal, an investment banker on the same 1% would be making it on a £500m deal ie £5m. This is where the big numbers come from and you can see why they are under pressure to make those loans, sorry investments.

The difference is that investment loans are hugely complicated which is why we need bright people figuring them out and choosing the best investments and risks. They also tend to be quite self centred egotists with a liking for the better things in life and some I met had a sense of entitlement that would make an MP looking at the latest John Lewis list blush.

So, the question that keeps getting posed is how to stop greed and instant gratification corrupting investment decisions and turning it to our advantage? I was thinking about that and my late Godfather sprang to mind. He too was a financial salesman and started just after the war selling life insurance policies on a door to door basis in Bradford and Leeds.

He had a very comfortable middle age and retirement but a very tight start to his working life because of the way he was remunerated. When I was having a few beers with him he explained to me how it had worked. He was paid a pittance of a salary which did nothing more than cover his daily food bill, but even more interesting was that he received very little in commission on the sale. What he did get, though, was an income stream from each policy as long as it was maintained, but he made the most money when they matured and paid out to his clients. He got very little if they cashed in early and sod all if they stopped paying.

This gave him the incentive to sell the right product to people who not only needed them but could afford them. Long after he stopped working hard at the age of about 45 he received a regular income and was able to spend an inordinate amount of time on the golf course.

So how do we translate this to bankers? Fairly easy I would have thought. Just give them a % of loans that are paid back, when they are paid back. I don't have a problem with them making 7 or 8 figure commissions, just that they only make it on the good ones and make very little on the bad ones.

This principle could also be applied to company bosses; again I have no problem with them being well paid when successful, its the pay off's to bad bosses that irks.

*The numbers I give are illustrative but from memory not far from reality

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