Sunday, 3 March 2013

Selling performance incentives - HSBC's Gulliver Travails through the land of Lilliput of Gold bonuses ,the EU Cap and Diocletian

CEO Stuart Gulliver has earned a great bonus for HSBC’s record performance £14 billion the biggest British bank number since before 2008.

Maybe he will give his bonus up like Barclay’s boss Anthony Jenkins that is entirely up to him.
Well done to all those salespeople who have worked so hard to produce these outstanding results of HSBC.

The fact is that you get the behaviours that you reward.

Performance related pay is not always necessary . However well designed and well supervised schemes can make sense at whatever level the employee is in an organisation.

There has been a substantial restructuring of City pay since the crisis including greater deferral of pay-outs, and the ability to cancel ( or claw back unpaid bonuses if they turned out to be based on unsound transactions. )
 By measuring customer satisfaction, cooling off periods, better procedures and guidelines these past errors  in the main have been rectified.

You might feel however that we need measures such as those 1,712 years ago (more of that later)

A new city landmark
The City has accepted that there were flawed compensation practises in the period leading up to the financial crisis but were the huge bonuses the sole root of the financial crisis ?

You would think so the way that the EU bonus cap could be required to start from 2014.

  Brussels’ attempt at wage controls is an ‘outdated, scandalous, absurd and self-defeating edict which will destroy jobs and reduce tax receipts. ‘ so many of the City writers feel.

By imposing a ratio between salary and bonus, EU lawmakers may force bank to increase base salaries - an unintended consequence.

 For sure sales bonuses enable companies to run bad decisions  more efficiently but the sub-prime lending would have probably happened along the way although probably more slowly had bonuses been 200% of basic pay rather than 400%

Perhaps we forgot rather too quickly that Governments, regulators, central bankers , academics , credit rates, accountants, Bank of England CEOs and bank employees...

 all thought sub-prime were fine, CDOs were fine and very low levels of capital were fine.

Bonuses merely facilitated errors that would have happened in any case.

It is fair to say that they also encouraged criminal actions and fraud – but that was due to a failure of policing and management or the contract design again the responsibility of the management.

Allister Heath,  editor of City AM Newspaper  listed ahead of flawed bonus structure the following :-

1.       Flawed inflation targets that omitted asset prices

2.       Low central bank interest rates

3.       Depressed yields on long term loans caused by global imbalances and savings gluts

4.       Government policies to promote sub-prime lending

5.       Banks’ insufficient capital and liquidity

6.       Absurd Basel rules that incentivised securitisations

7.       Incorrect mathematical models

8.       Useless credit rating agencies

9.       A massive over optimism and collective madness which led to huge but genuine errors of judgement. Too much money was lent too cheaply to far too many dud, usually property based projects; thousands of institutions ended up exposed.

That having been said setting sales targets and incentives for your salespeople is an important area of any business whether it high finance , a bank , an estate agent or a shop.

Sales managers need to set clear targets for their salespeople, linked to incentives such as commissions and bonuses - this motivates them and provides a clear indication of the kind of performance expected of them.

This process is crucial to the success of their business and needs to be closely tied in with the rest of their company’s business strategy and planning.

Being specific when setting targets for sales staff – typically they break their business generation requirements down into three different areas, for example:

• Developing New Business from Prospects - working from the projections in the business plan and sales forecasts - these will take into account changing market and economic conditions.

Renewals and Growth from Existing Clients – protecting and expanding existing customers.
A typical renewals rate is in the region of 60 to 70 % according to Business Link  July 2011.

Lapsed customers - a good salesperson should be able to recover some of the company’s past customers who have not bought for some time.

Looking at the business and identifying the factors driving its profitability – Sales managers use these to drive their sales targets as well through tactics of up selling and cross selling.

 Different businesses may require very different targets

Sales managers have to balance between making sure that the targets set for their new sales staff are reasonable for the territory they've been allocated, to making things too easy which may lead to complacency and lost sales, while making them too difficult can be demotivating and lead to lost sales.

Setting activity targets for your salespeople

As well as setting salespeople targets for the number of sales they want them to make, you should also set them activity targets. These include all the individual aspects of their day-to-day duties that their sales team will carry out as part of their jobs - and which should lead to sales.

Activity targets might be ( often included as part of their CRM system):

Completed phone calls - asking sales staff to record the number of calls they make that are completed with potential customers.

Face-to-face meetings - getting salespeople to record the number of appointments they make with customers where they attempt a sale.
Leads generated - measuring how effective your staff are at extracting new leads and generating potential new contacts.

Leads followed up - see how successful and fast your sales staff are at following up sales enquiries generated by your marketing activity.

Qualified prospects - ask sales staff to let you have the qualified prospects that they have identified. These are people who have been picked out as needing the products or services that you offer and who are able to purchase, but who haven't approached you - or been approached.

This is an important area of the sales process, as continual efforts by the team to to generate new business leads may help keep sales figures steady or on the increase.

Sales managers would do well to monitor this area of their work just as closely as the actual sales figures.

The approach to setting targets by the sales manager respondents to the Business Link survey showed the majority 53%  ( sms 52.7% ) choose to set very clear targets for their team members but leave them to organise how each team member achieves them.

 A further 33% (sms 32.7%) let their sales people set their own targets and work with them to discuss how they will achieve them and whether they should be changed.

13% (12.7% sms) set targets within a higher/lower range and leave the individual to determine what and how they achieve them

. Only 1.8% let their salespeople set their own targets and achieve them in their own way.

Of course you might preer the capping of bonuses like the EU have suggested last week

Boris Johnson the Mayor of London referred to the EU’s bonus capping measure  as

‘..Possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire.’

I had to look up on Wikipedia Diocletian’s edict of 301 to see what the Mayor was on about

Remember the 1712 years ago I mentioned at the beginning of this post ?

The Edict of Maximum Prices from Diocletian in 301 was an attempt to control runaway inflation and poverty in the Empire.

 The penalty for exceeding the prices of the Edict was severe: death.

 Not satisfied to execute just the seller, Diocletian decreed that the buyer was to be executed as well!!
 [ Just imagination how the horsemeat scandal would have been dealt with back in 301 !]

 As a final measure, if a seller refused to sell his goods at the stated price, the penalty was death. ( No doubt rebellious and pesky Gauls  back then ignored rulings from the centre much like today :-) !)

The edict did not solve the problem, and Diocletian also flooded the Roman economy with newly minted coins. ( I guess 'DE'  [Diocletian easing!] as opposed to QE )

Since the edict set prices, it actually hurt the economy. By 305, the end of Diocletian's rule, people almost completely disregarded the edict. It was not until Constantine's currency reform that the Roman economy stabilised.

I reckon Diocletian might have felt threatened by Stuart Gulliver's HSBC empire though perhaps Brussels does as well.

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