Posted on October 16, 2008 by

City Bonuses are NOT the Problem, A Narrow Focus on ‘A Players’ is!

In the wake of one of the most turbulent periods in the history of the financial services industry many politicians, regulators and members of the public have cited the prevailing bonus culture, in particular, excessive bonuses as the root of all evil. This feeling is such that as governments around the world have nationalised banks, they have also explicitly sought to control bonus structures and payments.   

However, we believe this is an oversimplification of the issue which in many cases is designed to make headlines rather than add sensibly to the debate. 

The bonus culture, both in the City and on Wall Street, is not the real problem. The real issue is a pervading bonus culture which is focussed on ‘A players’ rather than on a balanced set of ‘A positions’. This narrow focus promotes behaviours that are not aligned to strategy.

As stated in a Harvard Business Review article a couple of years ago, “A single-minded focus on finding and developing A players misses the point. A better approach is first to identify strategically critical jobs, then to invest disproportionately to ensure that the right people—doing the right things—are in those positions”.

Within the context of financial services the ‘A players’ are often the traders, deal makers and management who are driven primarily to increase revenues. Rarely are people in risk and control functions considered ‘A players’. This does not reflect the quality and capability of these people as individuals; rather it reflects how these functions are viewed in many organisations.

However the credit crisis has clearly shown that focusing solely on driving up revenues and generating ever increasing fees without considering the related risk is not sustainable and leads to destruction of value on an eye-watering scale. 

So rather than adopt an over-simplified (and politically expedient) ‘stop all bonuses’ approach, we believe that the industry must change to a bonus culture based on ‘A positions’ – the positions that are ‘strategically critical’ to delivering value to shareholders, employees and in some cases government masters.

Obviously moving to a bonus culture based on ‘A positions’ rather than ‘A players’ would not stop large bonuses being paid, and many of the current ‘A players’ are probably in ‘A positions’. However, what it would do is better align bonus payments to the fundamental risk and reward relationship at the heart of every commercial enterprise. It would also change the relationship between the business and its risk and control functions. As business set their goals and objectives they should be considering their risk appetite by asking what level of risk they are prepared to take to achieve this goal or objective. Do they need to change the objective? Do they need to change their risk appetite? Do they need to change their level of internal control to allow more freedom to perform or to tighten them to bring down levels of risk?

The natural outcome of asking these questions at a strategic level would be a greater recognition and understanding of the role risk and control functions have to play in achieving the strategic objectives of the business.  With this recognition should come understanding of why key positions within risk and control functions (and other functions) should be deemed ‘A positions’ and receive the bonuses and investment that is appropriate for these ‘strategically critical’ positions.

Businesses can use the Risk-based performance framework to provide guidance when determining ‘A positions’. The underlying rationale of Risk-based performance is to balance performance, risk and controls, integrating the performance and risk management processes and ensuring strategic activities are aligned.  Therefore when considering classification of positions think about them from a performance, risk and controls perspective. Consider how the position contributes to achieving strategy or managing risk, bearing in mind both the upside and the downside of the risk. 

Taking a ‘A positions’ approach will lead to a more balanced approach to the distribution of bonuses thus it will lead to a changed set of behaviours and changes in culture, perhaps to a culture better equipped for the economic environment ahead of us, rather than the one left behind us. 

It will also lead to the status and importance of risk and control functions increasing in the business which will lead to more sustainable execution of strategy and creation of value.

Whilst the businesses have a responsibility to make these types of changes, risk and control professionals also have a role to play.  After all they are likely to be receiving larger bonuses and playing more important roles in the business. They must accept the underlying rationale for the business and value creation as well as ensure that risk and control strategies, processes, frameworks and technologies are designed with value creation in mind, rather than creating cumbersome processes focused on box-ticking which do not add value. This must begin at the coal face adding value to those involved in the process.