Bankers' Bonuses rewards for simple mechanical tasks

I stumbled across this really interesting and entertaining video of Dan Pink discussing the social science behind  motivation and rewards. In the speech, he quotes some 2005 research where economists, D. Ariely et al, set a bunch of MIT students various tasks with varying levels of bonuses for success.

Their results were intriguing:

As long as the task involved only mechanical skill, bonuses worked as they would be expected: the higher the pay, the better the performance.


But once the task called for "even rudimentary cognitive skill," a larger reward "led to poorer performance."

These results have been borne out in many other studies too.

The logical conclusion of this research, if the bankers are right in that they need to be paid their huge bonuses, is that investment banking does not require even rudimentary cognitive skill. An interesting thought.

I'd recommend watching the whole video. It explains why, for most types of work, bonuses reduce performance rather than improve it and gives us all food for thought when it comes to rewarding our own employees.




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Very funny take on the UK banking shake-up

I have just received a link to a silly but very entertaining take on the break up of the bailed out UK banks that I just had to share:

Banks to be broken up into kittens

Enjoy!


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Can governments legislate morals into markets?

Today, the UK Prime Minister, Gordon Brown, said in a speech to the Labour Party Conference that "Markets need morals". He also went on to say that the the government will introduce a law to intervene on bankers' bonuses. The UK is not alone and there are calls all around the world to legislate on these matters. This makes me a little uneasy.

What if the amount of regulation and legislation was the cause of
the absence of morals?

In my experience, excessive legislation tends to allow individuals (and society as a whole) to abdicate their own responsibility to apply moral judgement. Over time this leads to the attitude that we can do anything we can get away with, within the rules. Professions that were once governed by their members' judgements of right and wrong (and their peers' approval and disapproval), are now regulated in everything they do. Wrong-doers get away with it if they tick the right boxes, whereas innocent mistakes are punished. In this environment, the distinction between right and wrong becomes a technicality. When you take responsibility away, people stop exercising it.

I might be being naive and I doubt we can ever go back, but does anyone else feel the same way?

I'd love to hear your thoughts, either way - examples too. Please comment below.

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Where to go when the banks say ‘NO’

by Glen Feechan

Although there are signs that the banks are gradually starting to lend again, it is not at anything like the levels business has been used to. I am sure many of you will be very aware of the lack of finance available from the banks even with a profitable business. What these same banks have done to the economy might bring you down too and they can’t take the risk!

Against this backdrop, I thought it might be worth looking to see if we can come up with some ways of accessing funds between us, without the banks’ help.

I have suggested a few routes to look at below, but I am keen that anyone should add their own ideas to the comments on the blog post so that we can all use this as a resource.

One of the more obvious routes is financing fixed assets you already hold, for example the refinance of properties and/or equipment/vehicles. Although finance is still tighter in these areas than it was, you may well have better luck than approaching the banks.

Another option along the same lines is to fund your debtors through factoring or invoice discounting. Due to the current climate you may not be able to fund as high a percentage as previously but this could be a very useful option.

If you are based in the UK, at FC Procurement we work with good suppliers in both of these areas, if you wish to explore the options.

Equity funding may be an option for some, maybe through business angels for smaller companies. However although funds are likely to be available, investors are looking for bargains and know they can get them.

For smaller businesses, short term loans from friends and family may be an option but think carefully, as if things don’t work out as planned you may damage a lot more than your credit rating.

One of the more innovative ways of accessing funds we have come across has now been used by a number of our owner-managed (UK) clients. It is now possible, under certain circumstances, to access personal pension funds to invest in private companies. A number of clients have used this method to access money tied up in pension funds from previous employers or in personal pension plans to invest cash in their own business.

This essentially brings a new equity investor into the business, without having to find one, allowing the long-term growth of the business to accrue to the owner for his/her retirement. This route may not be for everyone and you will need to talk to an Independent Financial Advisor (IFA) to discuss whether it is the right route for you. If you want to know more, we work closely with an IFA with experience in this field and can introduce you. Just drop me an email (glen@feechan.co.uk) or call on 0845 6439693.

These are just a few ideas, but please add your own in the comments below. Together we can get through whatever is to come.

Banks vs Property - a thought-provoking report

I just received a link to this free report from a property investment advisor whose mailing list I am on.

Clearly he has a particular inclination towards property investment, but I thought the report was worth sharing for its rather alarming summing up of the current crisis, and the state of the banks.

Have a look yourself at:

http://www.andyshaw.com/urgent-report

I'd appreciate any comments from any of you once you have read it.

2% Interest Rates - what will the banks do?

Well, I think it's fair to say that the Bank of England are no longer pulling their punches. Interest rates are now at 2% and forecast to drop further in the new year. I have even heard talk of the base rate dropping to zero!

Hopefully this now starts to filter through to businesses, although for most businesses I come across, it is access to borrowing rather than the rate that is the problem.

We may find that the banks still don't pass on the rate-cuts and use the extra margin to bolster their balance sheets. Obviously there has to come a point when they no longer need to do this and they clearly need to lend to somebody to earn any money. Hopefully that point is now closer with this further rate cut.

As usual, Robert Peston at the BBC has an interesting analysis of the problem and the dilemma the banks have got themselves in.

Arrogance of banks

Has anyone else received a guide from their bank on surviving the recession? I received one this morning entitled "Trading through the Economic Downturn".

I was expecting some advice from the bank's own experience but I have scanned it from cover to cover and they seem to have kept the advice that really worked for them to themselves. As they seem inexplicably shy about revealing their best tip, I thought I had better do it for them:

The banks' real approach to trading through the downturn:

"Gamble everything to make sure you get your bonuses and then ask the taxpayer to bail you out."

Am I missing something?

The link between the base rate and what the banks charge us

Following yesterday's rate cut, I came across this blog post from the BBC's Robert Peston, that is one of the clearest explanations of the complex links that drive the rate that businesses and consumers get charged.

Will a 1.5% interest rate cut do the job?

Today the Bank of England dropped its usual "steady as she goes" image to make a dramatic (and larger than anyone even asked for) rate cut to bring the Bank Base Rate down to 3%.

But as Mervyn King bends over the twisted body of the British Economy, shouts "Clear!" and applies the defibrillator, will it be enough to restart its bruised and battered heart?

If the rate is passed on (and quickly) to mortgage payers and businesses, it might just get people thinking that they can afford to go out and get some Christmas presents in, helping out the retail sector.

Again, if rates are passed on, and the banks are prepared to lend (big ifs), this could be a great time for all of those first-time buyers who have not been able to afford to get on the housing ladder to take advantage of cheap house prices and low interest rates - giving a boost to the construction industry.

Combined with a new president, and a new found optimism, in the US, maybe things won't be that bad after all.

Or am I clutching at straws.

What does everyone else think? Please leave a comment.

A salutory Excel lesson from Barclays and Lehman Brothers

I have reproduced the following article from AccountingWeb because I think it is a very amusing, yet sobering demonstration of the importance of using Excel properly, and ensuring that Excel spreadsheets are set up in a robust way:

Hidden spreadsheet rows hit Barclays with toxic Lehman
contracts

On Tuesday 5 November, lawyers for Barclays Capital appeared before the US
Bankruptcy Court in New York to try and extricate the company from taking on
Lehman Brothers liabilities accidentially included in a PDF copy made of an
asset spreadsheet. John Stokdyk reports.

Following Lehman's collapse in September, Barclays Capital agreed to
pay $1.35bn for the failed bank's assets once they had been stipped clean of
some of the more toxic elements.

Unfortunately, a docket submitted by Barclays' representatives Cleary
Gottlieb Steen & Hamilton LLP to the bankruptcy court in advance of the 22
September sale date included 179 contracts that should have omitted.

In an affadavit uncovered by the Above the Law.com website, the junior associate who compiled
the list explained what happened.

On the evening of 18 September a colleague asked the clerk to help
reformat an Excel asset spreadsheet and convert it into a PDF.

"Some of the rows of the original Excel spreadsheet were spaced too
close together or too far apart, making it difficult to read when printed or
converted to PDF format. I therefore globally re-sized all the rows in the
document to make it easier to read when printed or converted to PDF format." The
clerk also removed several columns that were not needed in the final document.

The coverted document was subsequently handed into the court, but the
clerk was not aware that the original spreadsheet included hidden rows, nor that
there were 179 contracts designated with “N” in a column to indicate that they
should not be included in the sale.

"I also was not aware that these hidden rows were exposed when I
globally re-sized the rows in the spreadsheet or that, once exposed, they would
appear without the original designations," the unfortunate clerk testified.

The law firm says that a junior associate had reformatted an Excel
spreadsheet into a PDF document to post on the court's website.

Clearly Gottlieb filed a motion to asking for relief from the final
sale order due to "mistake or excusable neglect" to extricate its client from the
potentially disastrous commitments.

Above the Law noted that the work took place just after 11:30pm. "Who
knows how much sleep anybody at Cleary got between Lehman crashing on the 15th
and the 18th when the mistake happened? And, as we all know, they don't teach
"Excel" in law school and they really, really should," it commented.

If you want to make sure you don't make the same kind of mistakes yourself,
take a look at the workshop I am running in January.

Hidden spreadsheet rows hit Barclays with toxic Lehman
contracts

On Tuesday 5 November, lawyers for Barclays Capital appeared before the US
Bankruptcy Court in New York to try and extricate the company from taking on
Lehman Brothers liabilities accidentially included in a PDF copy made of an
asset spreadsheet. John Stokdyk reports.

Following Lehman's collapse in September, Barclays Capital agreed to
pay $1.35bn for the failed bank's assets once they had been stipped clean of
some of the more toxic elements.

Unfortunately, a docket submitted by Barclays' representatives Cleary
Gottlieb Steen & Hamilton LLP to the bankruptcy court in advance of the 22
September sale date included 179 contracts that should have omitted.

In an affadavit uncovered by the Above the Law.com website, the junior associate who compiled
the list explained what happened.

On the evening of 18 September a colleague asked the clerk to help
reformat an Excel asset spreadsheet and convert it into a PDF.

"Some of the rows of the original Excel spreadsheet were spaced too
close together or too far apart, making it difficult to read when printed or
converted to PDF format. I therefore globally re-sized all the rows in the
document to make it easier to read when printed or converted to PDF format." The
clerk also removed several columns that were not needed in the final document.

The coverted document was subsequently handed into the court, but the
clerk was not aware that the original spreadsheet included hidden rows, nor that
there were 179 contracts designated with “N” in a column to indicate that they
should not be included in the sale.

"I also was not aware that these hidden rows were exposed when I
globally re-sized the rows in the spreadsheet or that, once exposed, they would
appear without the original designations," the unfortunate clerk testified.

The law firm says that a junior associate had reformatted an Excel
spreadsheet into a PDF document to post on the court's website.

Clearly Gottlieb filed a motion to asking for relief from the final
sale order due to "mistake or excusable neglect" toextricate its client from the
potentially disastrous commitments.

Above the Law noted that the work took place just after 11:30pm. "Who
knows how much sleep anybody at Cleary got between Lehman crashing on the 15th
and the 18th when the mistake happened? And, as we all know, they don't teach
"Excel" in law school and they really, really should," it commented.

UK Financial Investments Ltd - The new Banking Behemoth

Earlier today (3rd November 2008), Alistair Darling announced details of the new company that will hold the taxpayer's investments in the banking sector. This new organisation, publicly owned, but managed autonomously by Philip Hampton, Sainsbury's chairman and ex-Lloyds TSB Finance Director, is set to dominate the UK banking industry for the foreseeable future.

Full report from the BBC

The BBC's Robert Peston's take on the new company

Gordon’s Alive: Why is Gordon Brown leading the way in saving the world from the credit crunch, and what can we learn for our businesses?

by Glen Feechan

Remember the dim, distant days of September 2008, when Gordon Brown was almost universally unpopular, wasn’t expected to last the year in his role as Prime Minister and everything he touched seemed to go wrong.

I am writing this on 13th October and Gordon’s plan to save the banks seems to be well-received by the markets and looks set to be followed by the rest of Europe and the US. The rest of the world seems to be turning to Gordon for advice and leadership on what to do about the crisis, weeks after his party didn’t even want him as leader.. What happened?

Clearly Gordon Brown has far greater experience than his fellow world leaders in dealing with the financial markets, from his time as Chancellor, however, I don’t think this fully explains the turnaround in his fortunes. There are some aspects of the last few weeks that we can all learn from.
Primarily, Gordon Brown didn’t panic. When bankers, the media and a large proportion of the general public sounded like Private Frazer from Dads’ Army – crying “we’re doomed!” – Gordon analysed the problem, and what he could do about it, and then got on with the job.

Lessons from Gordon

1. Don’t Panic
This time it’s Corporal Jones from Dads’ Army. It is so easy to get swept away on the tide of hysteria and bring your business activity to a halt – not because customers are not buying, but because you have stopped making decisions for fear of making a bad one. It is imperative that we review our activity and decide what activities are important for moving the business forward, and make sure we continue doing them!

2. Work on your Circle of Influence
A useful model I often use, from the personal development field, is that of the “Circle of Influence” and the “Circle of Concern”. This model can apply to both individuals and businesses. Our Circle of Concern contains all of the things that concern us, that bother us. This circle is usually very large, and has recently become a lot larger for most people and businesses. Our Circle of Influence is a smaller circle, inside the Circle of Concern, which contains all of those things that we can influence.
We all get dragged into our Circles of Concern, but the time we spend there is of no use, as we can’t change anything. As a result, our time and effectiveness is gobbled up by our worries, actually shrinking Circle of Influence.

The good news though, is that if we spend our time in our Circle of Influence, we are not only a great deal more effective, but our Circle of Influence actually grows as we move forward, bringing things that were previously in our Circle of Concern under our control.

So much of the global financial crisis is in our Circle of Concern and not in our Circle of Influence that this model is incredibly appropriate at this moment. Work out what is under your control and put all of your efforts into that. The worst case is that you still fail, however this effort will not have made things worse, whereas worrying about the things you can’t change very well might.

3. Put it all in perspective
Keep a clear head and remember what’s important. I bet if you were to list the top three most important things in your life, they would have nothing to do with the FTSE-100 or the banks’ liquidity, or even your house, car or job. Take some time to spend with your partner, your children, your friends or in nature. The credit-crunch threatens none of these, but worrying about it might!

Here’s to a profitable next twelve months.

Glen Feechan is Chief Executive of the Feechan Consulting group of companies and editor of Not Just Numbers. Email Glen at glen@feechan.co.uk.