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Investors have been regaining a measure of confidence in the revealed intentions and recent actions of the leadership of Barclays (LSE:BARC). Reports surfacing today indicated that the board may be about to restructure its executive bonus plan. Share price was up 2.92% from 171.35 at Friday’s close to 176.35 at midday. This stock has been on the increase for nearly a fortnight, regaining nearly 50% of the valuation lost between 20 June 2012 and 25 July.
The Bank May Use a Longer Stick
Effective incentivising is a tricky business. Managing boards must be able to get inside the minds of the staff to figure out if the incentive offered will produce the result desired. Without careful planning and consideration of all the potential responses to incentivisation, it is entirely possible to achieve results that are in contrast to what was hoped for. The problem is that no one knows what evil lurks in the hearts of men who live for ways to make their bonuses.
The simplest incentive concept is the carrot and the stick. The effectiveness of the bonus is dependent primarily upon the size of the carrot and the length of the stick. Current reports indicate that Barclay’s is at least considering using longer sticks, and they may be checking into carrot alternatives.
Deferred payment of bonuses is definitely on the table. How to do that in a way that helps the bank achieve its desired results whilst retaining employees who have long rather than short term aspirations will be the secret for success. At least one of the methods under consideration is deferred payments. Whilst that doesn’t actually lengthen the sticks, its effect is similar in that it puts the carrot into cold storage. The immediate satisfaction is that you are awarded the bonus. The long term effect is that you don’t get it until your retire; or until some other milestone is achieved.
How This Could Help the Bank
By delaying the benefit of the bonus, the bank now has the liberty to adjust for poor performance, something that most incentive plans do not do. In other words, “You’ve earned 20,000 carrots over the past five years, but this year your performance cost us to lose customers and revenues, so we are going to incentivise you to not perform that way again. We’re going to take back 4,000 carrots.” Another possibility is that you may lose a percentage of your carrots in storage should you leave your post to work for someone else.
There are all sorts of variables and possibilities. In the end, as long as investors see that the bank has implemented a fair and reasonable system – something better than “Here are 10 million carrots for doing the job we already pay you to do” – they are likely to continue to show their confidence in the bank. At the end of the day, it’s still all about the money and investors don’t expect their “fair share” to be used to pay ridiculously out-of-proportion amounts of money on bonuses to employees who adversely impact the banks profits, demonstrate questionable ethics, disappoint customers, and use the bank’s bonus system to line their own pockets as their priority.
Barclays “gets it.” Their shareholders can see it.
