A headline in last week's national business newspaper, The Globe & Mail, read, "What recession? Bonuses swell at Big Six banks". I'm sure that paranoid readers just love this kind of reporting because it feeds"the hate banks syndrome", or HBS. The team at WESI,and especially myself, has been very critical in the past of excessive bonuses that feed greed or compromise ethical principles anywhere in our industry globally. Insofar as the Canadian large banks are concerned, let's not assume from the reporter's verbiage that incentive compensation is misdirected or out of control.
First, we believe that management should have the majority of their compensation as a variable component based on attracting or motivating the right behaviour for all stakeholders including customers and the communities they serve. Paying large fixed contracts, regardless of performance, will not attract the right competitive talent nor build a team that is self-directed around the correct strategic and operating goals. Naturally, the compensation variables for retail and commercial bankers should be different than the investment banking/treasury traders who require tailored controls and strict directions. Similarly, one does not want sales staff and risk management professionals motivated by all the same incentive elements.
Incentive compensation has to vary according to performance impact potential, desired behaviour models, and "checks and balances" required.
Second, suggesting that bonus pools are out of line because they are too large even if the allocated funds are based on the desired, exceptional competitive performances, is externally erroneous. Yes, paying excessive bonuses when the FI has poor performance results is wrong since there are obviously major "disconnects". The past couple years, did not confirm that variable compensation was bad. The damaging industry experiences pointed out that incentive schemes were poorly designed, managed and perceived. So, if the correct relationships and variables are in place; they are monitored properly; and, all publics understand stakeholder value creations and controls, we shouldn't see continuous headlines bashing banks for doing what is right.
Finally, those in every industry responsible for incentive compensation programs must understand the perceptions of the media and various public and political groups and become more sensitive to the need for communication, education and transparency. This is no more important a role model catalyst than with the people in the Board room where governance responsibilities rest. Directors who do not understand these performance issues and their responsibilities need to be given quick, indepth orientations or alternative roles. The Canadian banks have a solid performance record during good times and bad and we don't believe that there is a corporate complacency in their organizations towards maintaining historical incentive foundations that need changing to meet today's realities.
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