If bankers had to pay for the privilege of working at their bank, it would focus the mind on who brings what to the table. My latest column for Financial News.
Over the next few months, very few people who work at investment banks (or asset managers for that matter) are going to admit to their boss that they might not be worth the bonus they have just been paid.
While most people believe that their bonus is a function of their own brilliance, most will also recognise that a huge part of what they generate for their firm derives from the value of the seat in which they sit every day.
With some justification, outside the industry the debate on pay and bonuses focuses on the mind-bending absolute numbers. While pay may be falling for most people in banking, at the top a small but growing number of hyper-bankers are earning almost as much as they ever did.
Inside the industry, the focus should be less on the absolute amounts and more on the relative amount that any particular individual should be paid compared with what you might expect someone sitting in their seat to make, given all of the advantages of brand, reputation, funding and infrastructure that comes with that.
In other words, what would happen to pay if you were able to isolate not only an individual’s direct contribution to a bank’s performance, but how that compares to “controlled” or “normalised” performance? The closer banks look, the more likely they are to find that a large number of people in the industry are underperforming relative to their value of their “seat”.
Isolating individual performance is hard enough: we have a natural tendency to exaggerate our own contribution to winning a playing down the important contributions of others.
Isolating how much a seat is worth is even harder. If you are an investment banker, the next time you are sitting in a boardroom with your client, about to sign a deal that will earn your bank an eight-figure fee, you might like to ponder the value of your own contribution to that deal relative to the “normalised” value of AN Other managing director at Goldman Sachs, JP Morgan or whichever bank you work for.
If you work in trading or sales, how much of your business would walk in the door if another trader had got the job instead of you? Should the guy across the street, who makes the same absolute trading profit for a smaller bank with higher funding costs, get paid more or less than you?
One way of looking at this is the analogy of hairdressers, most of whom are not employed by the salon where they work – they rent a seat there. The seat is more expensive in a big salon with a better reputation than in, say, your local high street.
In each case, hairdressers take home their revenue less what the seat costs.
While working in the branded salon generates a higher overall revenue, the seat costs more and the hairdresser has to generate enough additional income to cover the higher rent. If banks were to charge staff for the opportunities that a seat in their offices provided, it would focus the minds of their staff as to who contributes what to the relationship.
Alternatively (for American readers) banks might like to introduce the banking equivalent of ‘VORP’ – a statistical measure used in baseball called the ‘value over a replacement player’ which quantifies the marginal value of any given player.
If you are that confident in your own ability, perhaps from January you would be happy to pay your bank for the privilege of giving you a seat in which to work?
A version of this column was originally published on www.eFinancialNews.com on 11 December