BFSI VISION | Human Resources


Girish VS

Managing Editor, BFSI Vision

Risk Adjusted Bonus

Human Resource – the word has a very impersonal tone to it. We need a better terminology for identifying the most important asset for a financial services organization. A normal manufacturing firm transforms raw materials to a finished product, and adds value to it. A financial services firm arbitrages between source and use of funds and adds value by the expertise of its “Human Resources.”

The history of financial services is littered with examples of failed firms – be it a Barings Bank, a Societe Generale, a Lehman Brothers, all of them have been felled by its employees taking, in hindsight, a dubious decision. We do take care when we recruit our resources. We do a background check – sometimes a very intrusive check. From Facebook, to LinkedIn to Twitter, we go through it all. And then we hire the person.

I am sure the failed institutions too had some kind of background check in place. They would have chosen wisely. Then why did the events happen. Why do frauds happen? My belief is that there is something in the DNA of financial services firms that bring out the baser instincts in some employees. It could be the skewed compensation structure, it could be the obsessive comparison with their peers – “Bhala uski growth meri growth se jyada kaise?” – How come he is growing faster than me? It could be a lack of skills in understanding the complexities of a modern financial services institution. That is a matter for a different blog.

From the compensation angle – we err on the side of caution – for the vast majority of the Indian financial services firms, compensation is fixed – and not linked to a quarterly profit target. Even if the institution sets a target, it should be based on Risk Adjusted Bonus Measure (RAB) – not absolute profits. A RAB measure for incentives would create the right framework for risk taking. And help the employee motivated for the right risk – reward ratio.

In conclusion, I believe there is a switch in our minds which keeps us ethical. Under some circumstances – which could be different for each individual – the switch flips and the person becomes reckless. Just as we need a better KYC, we need a better KYE – Know Your Employee – not in terms of a photograph and address – but an understanding of what drives a person. We need to know what will flip the switch. Unfortunately, financial services firms do not focus on this aspect.