The firms that will survive and prosper will not be those that adopt the latest technology – the survivors will be the firms that make the organisational change to utilise new technology in the right way.
Focussing on etrading – yes of course there will be a continued uptake as the world gets their OMS/EMS in place and connectivity evolves, but big, bold, fundamental changes in sellside offering will only come when that firm makes the organisational change to correctly support the offering. Now I’m not talking about tech support here, I’m actually talking about overall organisational support to make the offering work from a business perspective. How doo you ensure your firm consistently and thoroughly supports their electronic offering? – the first thing to get right is the sales credit.
1. Sales credit for salesguys
In current form the institutional salesforce may (or may not … depends where you work) be rewarded with a sales credit for their clients’ electronic trades. With a sales credit generally expressed in money terms, even though we all know that money amount does not reflect the value in the trade, especially as margin is ever-shrinking in electronic trades, should the salesguy sitting on a gazillion quids worth of sales credits by year end get a whopper of a bonus based on that? The answer of course is that they may indeed deserve to get that whopper, but it needs to be because of the work they have done to secure that business, in the context of the work everyone else has done to secure that business, in the context of the value of the business to the firm.
- Example 1; If the salesguy doesnt ever talk to the e clients, doesnt ever need to cajole or convince them to execute a particular trade, and indeed the only trades the client does are simple trades in flow products, pretty much to the level that you’d expect for the year, then why is the salesguy rewarded in any way for those trades?
- Example 2; If the salesguy has been out on the road all year executing a sales strategy to get N of the firms’ target clients signed up and using the platform, then a measurement of the number of clients doing even simple trades in euro benchmarks really should be significant in terms of their incentivisation.
The tough thing is the value to be attributed … so for these examples, what’s the value of that 10m client buy of euro benchmark back in April? Don’t forget to add to the calculation the fact that the trader had to quote choice price at the time to win the RFQ , and as the price on their next hedge was a bit higher they ended up in terms of flash out of the money for that trade. Oh, also adjust the value because the IT department is going to put in a charge for team of 20/200/2000?? supporting that part of “the business” in terms of development, tech-support, connectivity, licence fees, and so on, and the ops guys have costs coming out of their ears to process all of this. On the other hand, the guys dealing with this client in the primary markets have a splendid relationship with them and the client clearly appreciates the choice price on their admittedly boring secondary market stuff, and from a bank perspective the only reason they run a secondary market desk in this product is to support the originators. Hooray – lets say the quants crunch some numbers and we reach some form of value for this. So how should that compare to the sales credit on an electronic trade in a 15 year credit?
2. Sales credit for all !
In this article about some banks’ recently adjusted compensation plans we can see that UBS say they are looking at rewarding support staff for the capture of efficiency gains (“we will enforce discipline in the way we manage costs, allowing us to direct our investment spending where it makes the greatest difference for our clients and investors. To do this, we will change the incentive structure within UBS to reward people who deliver efficiency gains as well as people who deliver increased revenues.”).
There really are many banks who struggle to align the interests of the different divisions in delivering a strategy to make the bank money – I often hear that the technology and or operations divisions dont seem to understand that without the business, there is no business for them to support. So by delivering on the sentiment of the UBS words above you should develop a shared interest in making sure the business is done..
All of this boils down to (a) having a strategy regarding what business you want to get in the door, (b) having plans in place to get that business in, and (c) incentivising everyone involved in executing those plans to ‘go get em tiger’. Of course to fully incentivise there also has to be an element of personal risk. Therefore if you do something (or dont do something you should) and the business doesnt get done as a result, you get a negative sales credit. So the worst case for your bonus isnt necessarily a doughnut … but isn’t that the point of the capital markets; the return you get for the risk you take?