Morning coffee: When to walk away from a $100m payout. The only people more sleep deprived than bankers
One of the most fundamental problems in investment banking personnel management is the eternal struggle to keep motivating people who have got a lot of money. It’s a conflict of interest between employees who want to make enough money to get out of the rat race and do something else, versus banks who have invested time and effort in building up a franchise and who want to hang on to valuable revenue generators for as long as they possibly can.
And it's a conflict which reproduces itself at almost every level of the hierarchy. Third-year associates have enough money to go back to college and pursue a doctorate, vice presidents have enough to go to Ibiza and open up a beach bar, while beyond-supreme-tier global rainmakers like BlackRock's Bennett Goodman might decide to just give it all up and set up a family office. So the question comes back at every annual compensation round: when someone has more money than most people earn in a lifetime, how do you keep them hungry? What do you get for the man or woman who has everything?
The answer from the investment banking industry has historically had two parts to it. First, banks rely on the “relative status treadmill” to keep their employees' lifestyle aspirations growing at the same rate as - or ideally a little faster than - their ability to realise them. The banker who achieves his dream of owning a Boxster will find that he now lives in a world where some of his friends have Ferraris. When you go to your ski lodge in Aspen, you socialize with people who have summer houses in St Bart's, and so on. Envy is one of the most powerful human emotions and a surprisingly strong motivating force.
The second widely used retention strategy is to treat your senior and experienced bankers like carnival donkeys, and to always dangle a slightly larger carrot, slightly out of reach. “Sure, you can give up and leave”, the implicit promise goes, “just as soon as your options vest”. But long-term incentive plans are designed to overlap - if you are at the level where a bank really wants to hang on to you, there is never going to be a moment when you can walk away without leaving a lot of money behind. In Goodman's case, he will be saying goodbye to a cool $100m in unvested BlackRock stock.
But in the end, the day always comes when enough is finally enough. In Goodman's case, it seems to have been less about the money and more about his ability to be sure that the business he built (credit specialists GSO Capital Partners) would continue with sound new management, although possibly not under the same name. At the age of 62, with absolutely nothing left to prove to anybody, he just decided that he’d reached his stop and it was time to get off the train. An example to us all. (Today’s Morning Coffee author also got off the train a couple of years ago, with considerably less than 1% of Goodman’s lifetime compensation).
Separately, another major inconsistency in the world of investment banking is the desire to have people making the very best decisions they can, but doing so without the benefit of having had a decent night's sleep. Since reforms were made a few years ago to the safety rules for hospital doctors, practically the only other people to make high stakes calls at the end of 84-hour work weeks are politicians at European summit meetings.
Alex Barker’s review of his eight years as chief Brussels correspondent of the Financial Times records the floundering towards Brexit along with the EU's efforts to handle the Greek default and the refugee crisis. It's a story that will be surprisingly familiar to many bankers, as one of the overwhelming takeaways seems to be the extent to which major political and historical events were driven by short-term thinking, bad temper and ego, at early hours of the morning. One can't help thinking that there's got to be a better way, although nobody seems to have found it yet.
London and Hong Kong have both been ruled out as listing venues for the Saudi Aramco IPO, despite the LSE having changed its listing rules to potentially accommodate it. This will matter quite a bit for banks' oil and gas teams, as there’s usually a strong sense that the location of the largest amount of market cap is presumptively where the global head is located. (Guardian)
Potentially good news for incumbent banks and their tech staff; the majority of the 5000 people surveyed by Oliver Wyman have no particularly positive feeling toward fintech and would be just as happy to use an existing bank if it provided the same services. (Financial News)
Jack Ma, historically an advocate of punishing working hours (the “996” concept of working from 9am to 9pm, 6 days a week), thinks that with assistance from artificial intelligence, human beings might not need more than 12-hours per week to get things done, not per day. (Bloomberg)
Costis Maglaras, the new Dean of Columbia Business School, thinks that data science is as important as management science and intends to introduce many more joint MBA and engineering courses. (FT)
It was initially set up as a quant fund, but Boaz Weinstein’s Saba Capital has developed a potentially profitable sideline picking fights with established asset managers over the corporate governance of their investment trusts. (Financial News)
And the most bizarre trade of the week: ancient, pre-revolutionary Chinese bonds are bought and sold on eBay as collector's items, and some people are now promoting them as investments, on the slight chance that the settlement of the US-China trade war might involve some payments being made on them. Some bondholders’ representatives have met with the Trump administration, but some people have been prosecuted by the securities regulators for promoting them to the public, so there is risk as well as return. (Bloomberg)