April 28, 2014 12:38 am

Death spiral is a myth to perpetuate high pay

From Mr Robert Pickering.

Sir, Like many of his shareholders, I was dismayed when Antony Jenkins, Barclays’ chief executive, came out with the tired old cliché of the death spiral to justify paying out higher bonuses to his investment bankers in a year when profits were down.

I ran an investment bank for a number of years and was regularly held up at gunpoint and told that we had to jack up so-and-so’s pay to prevent him or her from leaving (usually for Goldman Sachs and invariably for “twice what they get here”). Sometimes I paid up and sometimes I didn’t, but the outcome in the long term was usually the same; people came and went, the business went through peaks and troughs but life carried on. In the febrile days of 2000, my predecessor was told that the very survival of our 200-year-old firm was dependent on the continued employment of a 20-something individual who had been in the industry for about 18 months. We offered him a partnership but he left anyway. A few years later, I reminded my senior management team of this incident and none of us, myself included, could remember his name.

It is true that these defections are disruptive, unpleasant and alarming for those who have to manage the immediate fallout but what is remarkable when considered dispassionately is not how fragile these businesses are but how resilient. There are many examples of firms that have survived changes of personnel and ownership but still managed to reinvent themselves as viable and successful businesses. I cannot think of a single example of a well-established firm ceasing to exist because of staff defections, although there are plenty of examples of firms going bust in bull markets because of poor management and excessive leverage.

The problem obviously is that the management of investment banks, right up to the top, have an interest in perpetuating the myth of the death spiral in order to justify high pay. It is absolutely ingrained in the culture of these organisations and Mr Jenkins’ antagonists at BarCap in the US, having been schooled in the rough, tough world of Lehman Brothers, will be master exponents of the art form.

What is needed is an equally tough and experienced manager who is able to see these threats for what they are and face them down, even at the cost of some short-term disruption. It is possible that Mr Jenkins will prove his doubters wrong and come out on top, but from my armchair it looks like an unequal fight and my money would be on the investment bankers.

Robert Pickering, London W8, UK

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Letter in response to this:

Death spiral myth is about to be tested / From Mr Christopher Cox

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