For the first time in my 10 years of writing about HR and reward strategies, the subject is at the top of the international political agenda. All because misaligned performance pay has been a major contributory factor in the biggest financial crisis since the 1930s.
In the attempts by US political leaders to agree a $700bn (£380bn) rescue package for the banking system, one condition that the Democrats insisted upon was that banker and executive pay be curbed. And last month, in the UK, the chancellor Alistair Darling asked the Financial Services Authority to draw up fresh guidelines on pay to help prevent excessive risk-taking by the banks.
The political and economic ramifications of this drama will be huge, with the ‘neo-liberal’ model that has prevailed in the past two decades reaching crisis point. In this model there is a short-term transactional approach to hiring talent, a misalignment between people strategies and business strategies, and faith in a flawed approach to gauging market risk.
As statutory authorities take more control over the banking industry, there will be more regulation on pay, and it would be easy to assume that such regulation is the big story, and that the HR agenda of reward and people strategies plays a supporting role. But having spent four months researching the subject, my studies indicate that the opposite is the case. Internal stewardship of the banks – the matters of talent, hiring and firing, reward and risk management – almost certainly have greater importance than the regulatory regime.
It is not simply a case of curbing bonuses. The economic impact of decisions made by the banks is greater even than the sum of bonuses awarded. The more important priority, therefore, is better performance and risk management, with reward and people strategies supporting this.
Just an illusion
There are many flawed assumptions in the way in which the banks have operated. In the past decade many of them have gone against the evidence base built up by leading thinkers that ensure the close alignment of business strategy, reward policies and people strategy. Just last year, I asked myself: ‘Why are the investment banks appearing to do so well? Everything they do on reward and people management is wrong’. The strong performance turns out to have been an illusion.
Banks were responsible for deliberate moves towards short-term, ‘hire and fire’ HR practices, relying on financial compensation as the only employee motivator. In the 1990s and 2000s, many banks ditched ‘old-fashioned’, long-term career planning and began treating people as if they were easily obtainable, easily disposable commodities, motivated only by money.
My research shows that, as well as perverse incentives in the bonus scheme, the banks had insufficient experience on trading desks and in the critical area of risk management. Crucially, they neglected the whole question of employee loyalty, thus exaggerating these incentives in the bonus structure. Of course, if the bonus is a life-changing sum of money, and the individual does not care about the future of the institution, why should they care about the long-term risk profile of the product?
The irony is that the deregulation of the financial markets may have worked perfectly well if only the banks had not been run on neo-liberal lines, but instead on the evidence and principles established by the human relations field – ie, if bonuses had been tied closely to longer-term performance, and skills and experience levels were matched to the needs of the business.
This is a historic moment for the HR profession. Its evidence and ideas would have prevented the crisis in the first place – or at least lessened its impact – and they can help chart a way out of it. It’s time for some leadership.
Strategic Risk & Reward: Integrating Reward Systems and Business Strategies after the Credit Crisis by Philip Whiteley. Published by IFR Special Reports, ThomsonReuters www.ifrmarketintelligence.com