September 1, 2009

Flogging Bonuses

Interesting article recently indicated that the U.S. Securities and Exchange Commission Chair was concerned that recruitment bonuses paid by brokerage houses might encourage the wrong behavior. The wrong behavior referenced is selling securities at all cost irrespective of whether or not they are appropriate for the customer.

Absolutely something to be concerned about! Imagine salespeople that would ‘make excessive trades to generate fees’ or would ‘recommend products that don’t suit their client’s objectives and generate fees with transactions that aren’t in their costumer’s interests.’

Well, that’s exactly what will happen. Remember the real estate meltdown in the US? In my book BE DiFFERENT or be dead I put forward the notion that the driver behind the toxic asset syndrome was a sales plan that motivated the flogging of mortgages at any cost without any responsible consideration of the buyer’s ability to repay the loan.

Instead of getting ‘good’ clients that could afford to own a home, the real estate companies created lending products that assumed real estate would continue to climb in value, and compensated their sales people to go flog them.

And, flog them they did. To the point of almost destroying the banking industry not just in the US but the world over.

So when the Chair of the Securities Commission worries out loud that big bonuses could motivate the salespeople (brokers in this case) to do something that is in their best interests and not their customers, listen up!

It will happen. Not because the brokers are dishonest but because they are hungry to earn their bonus. Sales will always do what the compensation plan wants them to do.

This is great news if the bonus plan is right; its a disaster if it is wrong and motivates the wrong behavior.

Cheers, Roy Osing

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Posted 9.1.09 at 06:33 am by Roy Osing | Read Comments (0) | Leave a Comment