The UK is undoubtedly heading for yet more financial instability. For many, the triggering of Article 50 and the resultant prolonged uncertainty that follows will spring to mind as the primary catalyst.
But there is a seldom talked about yet very real danger posed by a more fundamental, institutional problem: the City’s inherently flawed remuneration system.
It seems to be a seasonal trend that, as listed companies head for their AGMs, remuneration practices come into focus as corporate governance becomes the flavour of the day.
Rightly, such events serve to highlight the company’s organisational structures and the bottom line. Stakeholders ask themselves “is this management and this approach really what’s going to deliver returns?”
Business as usual
The bonus structure, and the prevalent culture of individuals doggedly pursuing key performance indicators (KPIs) at the expense of best safeguarding client assets, is frequently pulled into question. But after a week or two of scrutiny, firms shouldn’t simply be allowed to go back to business as usual: this leaves the systemic risks unchanged.
It’s time for a radical change in the City’s – and politicians’ – attitude to remuneration policies.
There is something inherently flawed and alarming about a bonus culture that is unduly focused on the individual. In effect we have a situation where individual KPIs are used to justify significant bonuses.
In my view, they act as nothing more than an incentive that fans exaggerated risk-taking without any regard to the overall outcome. There is, at present, zero downside risk or accountability for their actions.
Here we go again
Let us not forget that it was excessive risk-taking that brought the global economy to its knees in 2008, and it is the same risk-taking that we need to manage now to stop history repeating itself.
It is patently obvious that KPIs are divisive. By focusing on individual performance, the process of setting, measuring and rewarding against KPIs encourages individuals to take risks they would otherwise avoid in an attempt to receive their bonuses.
My working assumption is, and always has been, that it’s the cumulative contribution of staff that is of most benefit to shareholders. I can only talk from my own experiences, but I’ve found a team approach has delivered superior returns for stakeholders and created a stable client base.
Rather than individual KPIs, we use our share price on a total return basis: it allows us to reward and retain our staff, and protect our clients.
For this to work, we have to employ the right people.
They need to be team players and, sadly, all too often, those who are encouraged to enter the financial services industry simply are not. This also needs to change, and if the reputation of the industry is rebuilt, I have every faith it will.
What I have learnt through the past 50 years is that when allocating bonuses there is a need to reward flexibility, motivation, loyalty and honesty. If the financial services industry is going down the path of KPIs, as it is currently, aren’t we simply confirming those very aspects that have got so many companies into trouble in the first place?
Barry Olliff is chief executive at the City of London Investment Group.