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A time-honoured incentive plan for agents, by agents.

Financial services firms have long struggled with the distinction between ownership and service. A firm’s owner takes her reward from the investment of capital — cash that the firm uses to acquire kit, rent premises, pay suppliers and hire staff, all in the collective enterprise of selling things — goods or services — for a return exceeding that capital outlay. As long as the firm does that, it is making money and its shareholders will see a return on their capital — simplistically, that net return, divided by the relative size of their stake.

For this, equity holders need not do anything beyond ponying up the money and not asking for it back. An equity holder can’t ask for it back, indeed: the transaction by which she invested in the firm was a sale and purchase: the money has gone. What she has in return is a share. If she wants out, the company is not obliged to offer her anything, let alone the sum she once invested. She may sell her shares, to someone who wants in, and will have to accept whatever they are prepared to pay. That, in turn, will depend on how well the company is doing.

One of the things a capital infusion can buy is servants. In the modern argot, we call them “employees”, though an important nuance — namely servitude — is lost in our formulation.

In any case, a servant is paid for what she does. She is the inverse of an equity holder — she must move to earn her keep, in the same way an equity holder can just sit there watching the money roll in.

In a perfect world — for a landed capitalist, at any rate — servants would be paid only and specifically for what they contributed to the bottom line. This is easier to measure for some employees than others: for salespeople it is straightforward. For back-office staff, less so. Legal officers especially so.

In any case, the civilising forces of the labour movement — quiet at the back there — have long since intervened to ensure that all servants are paid a pre-agreed basic wage for their time at work, however productive they are.

Now econometricians will say, a fixed wage for showing up time spent is no great incentive for a servant to strive for excellence. The history of financial services employment practice has been the effort to engineer suitable alignments given the confines of employment regulation.

You can always offer staff the carrot of annual pay rises, but this has a ratchet effect: a servant whose work quality declines over time cannot really have her pay reduced — employment regulation makes this procedurally difficult. So payrises tend to be anaemic, hedged about by concern for the firm’s cost base should the business environment deteriorate.

On the other hand, should the business environment improve good staff disaffected by unimpressive pay rises tend to be biddable by other firms prepared to pay more.

The alternative is “discretionary” compensation. For salespeople,

See also

• Donut
• Compensation
• Reduction in force