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| (e) The Individual <br>
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| :::(i) Motivations:<br>
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| ::::(1) FEAR. This is the chief motivating factor for any individual. <br>
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| :::::(a) Types of fear:<br>
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| ::::::(i) Fear of screwing up. <br>
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| ::::::(ii) Fear of the known unknown <br>
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| ::::::(iii) Fear of remote but foreseeable contingencies – the chicken licken scenario<br>
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| :::::(b) Some legitimate risks do not create fear:<br>
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| ::::::(i) unknown unknowns – black swans – do not create fear. It is hard to blame someone for not anticipating something that, qed, could not be anticipated.<br>
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| ::::::(ii) Emergent risks – risks that only arise at a level of abstraction beyond that for which the employee is directly responsible or accountable. <br>
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| :::::(c) Behaviour which reduces fear<br>
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| ::::::(i) Repeated tasks<br>
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| ::::::(ii) Familiar tasks<br>
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| ::::::(iii) Pre-established modes of operation<br>
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| ::::::(iv) Behaviour which is characteristic of most people in the organisation (homogeneity) <br>
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| ::::::(v) Decisions for which somebody further up for line or across the organisation has accepted responsibility<br>
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| ::::::(vi) Encouraging others to underwrite risk or collectivise /diffuse risk<br>
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| :::::(d) Behaviour which accentuates fear<br>
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| ::::::(i) New situations <br>
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| ::::::(ii) Unhedged risks<br>
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| ::::(2) REWARD. Compensation for what you do. <br>
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| :::::(a) Generally an employee does not have an equity stake in the business (OK, OK bonuses – we’ll get on to that) <br>
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| :::::(b) Employee reward is pre-defined: there may be incentive structures but employees for the most part get fixed compensation. They are creditors of the firm for that compensation. Unless the firm is bankrupt, they are paid regardless of performance. The sanction for poor performance is termination. It is very hard to reduce fixed compensation. <br>
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| :::::(c) The larger the firm the more specialised the staff, the fewer are specifically revenue generating roles. Most of a multinational Bank is infrastructure: operations, risk management, IT and increasingly middle management : infrastructure to manage the infrastructure. <br>
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| :::::(d) Therefore only a small portion of the staff have any grounds for incentive based compensation. Some could be incentivised by cost management, but for many – risk, legal, compliance – performance related pay is largely antithetical. <br>
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| ::::::(i) This will not stop enthusiastic general counsel arguing, in times of feast, that his legal team are skilled enablers of revenue generation, and should be compensated for the profits they help to bring in. <br>
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| ::::::(ii) The stock reply: turning a control function into a profit and loss centre has bee tried before. It didn’t work out so well. <br>
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| :::::(e) The bonus culture. No doubt to redress the fear / reward balance, investment banks shifted towards a bonus culture throughout the eighties. <br>
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| ::::::(i) Many of these firms started out life as partnerships, where those bringing in the profits were personally liable for losses, and the compensation they shared was specifically the equity. These firms took advantage of regulatory change to incorporate. The partners changed their formal status (if not their titles) from partner to employee, but the compensation structure remained. While these firms encouraged equity participation (to the point of paying compensation in shares) employees main source of income was celery and not share performance. Indeed the manual dilution of equity capital in the bonus round had the typical effect of depressing share performance. In this way and in many others comma employees in these Incorporated partnerships were and continue to be systematically preferred over equity holders. The same pay structure has been adopted by competing banks which have always had a corporate structure full stop the lesson of the last 30 years has been only a mug is long banking stock .<br>
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| ===Form over substance===
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| :(a) Burgeoning complexity means a preference for substance over form<br>
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| :::(i) As previously rehearsed, the more complex the organisation the less likely people are to understand the substance, let alone be responsible for it. <br>
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| :::(ii) The form is, by definition, easily articulated. It is measurable, observable, auditable. <br>
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| ::::(1) “Did you review that template by year end?” has a yes/no answer which is easily given in the affirmative. All you need is a diary and a decent sense of time management. <br>
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| ::::(2) “Did you review the template properly?” is a harder question to answer. <br>
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| :::::(a) Did you check it against policy, legal developments and corresponding templates” is a harder question, but it has a yes/no answer. It functions like a checklist. <br>
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| :::::(b) Did you get the right answers? Is hard to validate. <br>
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| ===Checklists=== | | ===Checklists=== |
| A word on checklists – eyebrow raising book of Atul Gawande. Illustrates the benefit, as well as the limitations, of form as an aide to substance. <br> | | A word on checklists – eyebrow raising book of Atul Gawande. Illustrates the benefit, as well as the limitations, of form as an aide to substance. <br> |