Written by John Lounsbury
There was an article this weekend in the Financial Times by Sharlene Goff that caught my attention. I have have been one of many screaming that perverse compensation incentives had a lot to do with the financial crisis. Lloyds is the first major financial institution that I am aware of that has announced an effort to change the "incentivization of bad acts."
Much has been written about the mortgage industry minions were paid for the volume of loans they processed without regard to quality. The greater the number of robo-signed documents pushed through the more all levels from actual pen holders all the way up to top executives were paid. Not one of them ever lost a penny of that compensation when millions of mortgages were no longer properly documented and recorded.
There has also been no secret about the packaging of debt securities into CDOs (Collateralized Debt Obligations) that included as a subclass RMBS (Residential Mortgage Backed Securities) which contained all the low quality loans dressed up in packages and sold as AAA securities.
And then there were derivatives constructed, such as synthetic CDOs, that created a deeper level of securities that laughingly still contained the word "collateralized" when the collateral was purely imaginary. Many synthetics simply mimicked the form of real CDOs without the substance of real collateral backing, just derivatives based on the "real" securities. I say "real" because, of course, there was often insufficient real collateral behind even the original breed of security.
Now I know that some CDOs were real (and still are) with sound collateral backing them. But what's the saying about rotten apples?
So it's time to get to the bottom line of this little rant. The article by Sharlene Goff discussed a plan that Lloyds Bank is starting - a pilot program to replace a sales and product based compensation scheme that has been dominant in the industry for many years with a plan that bases compensation on customer satisfaction.
It's about time!
And while they are at it, why don't they initiate an executive compensation plan that defers most compensation and bonuses for ten years. The big bucks shouldn't be paid until the long-term effects of actions are known. All should be forfeited if damage has been done or no lasting growth and benefit derived by the company.