Experts

Why private banks must curb excessive compensation… quickly

"Bonuses had just been announced to all our private bankers. One by one they came to my office to thank me. Every single one of them said that the bonus was significantly above their expectations. Then my alarm clock rang and woke me up.” If this is so far-fetched that it could only happen in the dreams of a private bank CEO, something needs to be fixed in this industry.

Date: Mar 30, 2011          Author: Anthonia Hui

Keywords: Compensation, Leadership, Hiring

"Bonuses had just been announced to all our private bankers. One by one they came to my office to thank me. Every single one of them said that the bonus was significantly above their expectations. Then my alarm clock rang and woke me up.” If this is so far-fetched that it could only happen in the dreams of a private bank CEO, something needs to be fixed in this industry.

Internal practices and cultures which fuel greed and unrealistic demands of (mostly) overpaid relationship managers (RMs) must be stamped out. Otherwise chief executives and their institutions risk suffering in the medium to long term as staff jump ship at the first sign of more money elsewhere.

That danger is becoming more and more acute given today’s ever-more competitive market environment.

But if the threat is so apparent, why do I feel the need to write about this issue?

After all, senior management are clearly aware of these problems – and publicly bemoan the fact that their competitors are only trying to gain ground in the so-called “war for talent” through digging into deep pockets.

The truth, unfortunately, is that many senior management simply don’t know how to tackle this. Or if they do know what might be effective, they don’t have the incentive and will to drive it through.

As a result, RMs think it is their right to earn these high salaries and bonuses. Even worse, these bankers will continue to make their unreasonable compensation demands – and more often than not get away with them.

Taking action

How management can deal with this situation inevitably varies from organisation to organisation, and on the individual business models.

As a result, the starting point is for management to clearly define how RMs get financially rewarded – and then stick to this.

Part of the problem has been that too many banks have typically structured compensation on the basis of a lower basic salary but a large bonus determined by new client assets and revenue from their book of business. Despite the second part of this incentive-based approach being out of sync with the regulatory focus on ensuring RMs don’t sell unsuitable products to clients.

As banks have tried more recently to shift the balance and pay bankers higher basic salaries but lower bonuses, this has resulted in two negative side-effects: first, RMs complaining their bonuses are too small, given what they have become used to; and secondly, the bankers being paid far more in basic salary terms than their experience, client books and years in the industry justify.

For example, it is common in Singapore and Hong Kong to see RMs who are aged under 30, with less than four years in the industry, and managing less than US$100 million in client assets, being paid a salary of S$15,000 or HK$100,000 per month depending on where they are based (roughly US$12,000 to US$13,000).

Chief executives need to carefully think about whether each individual is really of the right quality to deserve this, rather than blindly reward them based on what they promise in terms of the book of business they can generate. If not, then they are incentivising the wrong type of people, and often such RMs fall short in delivering what they promised at the time of engagement.

That results in high cost-to-income ratios for the bank and makes the chief executives look really “stupid” in front of their board.

A further problem management face is being held hostage by greedy RMs.

For instance, whenever I see yet another chief executive announce his or her ambitious hiring plans over the next one, two or three years, the first thing which comes to my mind is: how they can seriously expect to find these staff at a cost which is sustainable?

Given that the combined hiring targets of all private banks in Asia exceed by a long way the amount of available RMs in the market, such statements effectively tell the relatively limited pool of bankers that they can write their own pay-cheques.

Management therefore need to be much more careful with the language they use as a starting point.

While being bold in their plans might massage egos, it doesn’t do any good for the institution, its clients, or the hiring process in general.

Instead, given the forthcoming requirements from regulators for private bankers to be better qualified, management must act now to sift through those staff which don’t make the grade.

Further, for many of the universal banks, they need to be clear in their segmentation of clients, and move away from muddling priority and private banking staff.

For instance, priority bankers who move into the private bank – but who tend to lack technical knowledge required to deal appropriately with high net worth customers – are often told by line managers to simply meet sales budgets by targeting those clients to whom they can sell investment products.

Clearly this is the wrong approach from a suitability and ethics perspective. But along the lines of compensation, it also fuels the problem of excessive expectations going forward.

Changing the mindset of line managers and the corporate culture in terms of compensation, therefore, are the priorities for senior management.

If management can present the facts and figures to understand the tangible value each RM brings to the organisation, and the revenue they generate, then they are more likely to win in the long run.

This will also stop the nightmares that chief executives are waking up to at the time of performance assessment and bonus discussion.

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