Merrill Lynch Case Study
Bidding War
It is difficult not to consider financial institutions like Bank of America and Merrill Lynch as villains, or at least, co-perpetrators in the financial crisis that brought America and the world’s economy close to the brink of collapse. The bailout program, such as the TARP, was a last ditch and desperate act of a government that had no idea how to solve the problem. It was not the best strategy to end the financial crisis; however, it was good enough to stop the boat from sinking. The government officials who had engineered the said deal did not think far ahead, and they were simply concerned with the short term survivability of the world economy. A few years after the infamous bailout program, the villainous characters in the story are back again, and this time, they seem to be mocking the system with a current bidding war for top brokers (Cynamon, Fazzari, & Setterfield, 2013).
This bidding war sets up the financial community to another cycle of bullish gains and sudden defeat. It is easy to predict the impending failure because the same pattern of behavior as well as its disastrous results has been manifested in the past. The failure will come from the financial firms’ need to recoup the investments that was utilized to attract and retain the said brokers. At the same time, the company will compel these brokers to increase the organization’s revenue, prompting the brokers to bend the rules. Furthermore, most firms will not benefit because only those with the most attractive compensation package will attract the best brokers. The brokers’ reputation and work life will also suffer because of the pressure to perform. Co-workers, especially those who are in the lower pay scale, will view them with disdain because of the amount of work that has to be completed on a regular basis due to the need to increase the company’s revenue.
Pay and Performance
The strong relationship between pay and performance is obviously the result of the nature of the job required. In industries that also exemplify a compensation package based on performance, the usual requirement is to sell a certain number of units or to bring in a certain level of revenue. In the case of the brokers, they are paid based on two specific objectives. First, they need to attract affluent clients who are willing to part with their hard earned money or their inheritance in order to invest with a particular finance firm. Second, these brokers are obligated to do everything in their power to make the investment grow.
It is interesting to note the behavior of the U.S. government in the aftermath of the historical economic bailout. It is seems fair to assume that the government had the clout and the influence to make demands on Wall Street to prevent the same problems from recurring. From a pragmatic standpoint, it is to the best interest of the U.S. government to protect its investment through the use of hundreds of billions of tax payers’ money to prevent the collapse of banks and other financial institutions. Thus, it is also to their best interest to place certain risk-averse measures and prevent maverick behavior of certain brokers so that they would not focus on making money at the expense of the company. As a result, a well-crafted cross-selling strategy strengthens the position of the company on the financial market. At the same time, it enables the company to weather the challenges and problems that will emerge with regards to a particular investment strategy. On the contrary, the failure to persuade brokers to use this type of business model will hurt the organization in the long run. However, it seems like the nature of the industry prevents the establishment of a company-first mindset because brokers are conditioned to believe that they are the star players in the game and that everything must adjust to their needs.
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Changing Compensation Package
It is prudent for Bank of America to change its compensation strategy to include more subjective assessments of performance and a greater emphasis on cross-selling. Subjective assessments and cross-selling act like a disciplinary measure and assure the U.S. government and various stakeholders that brokers will never be tempted to focus all the earning potential of the company in one financial instrument or invest heavily in one particular strategy. However, this guideline is not so easy to follow because brokers have the liberty to choose where they want to work. As a result, companies that are on the hunt for top brokers cannot risk to alienate the best available talents by compelling them to adhere to a set of inflexible rules and rigid standards. Due to these constraints, financial firms are forced to make a difficult decision and develop a compensation package and an offer of employment that will be both lucrative and aligned to the needs and wants of the brokers.
This realization strengthens the oftentimes neglected truism regarding the impact of talented brokers in the financial industry. Nevertheless, it is important to carefully consider the unintended consequences of overhauling the compensation package. It is important to remind the stakeholders and government regulators that a significant cause of the financial crisis of 2008 can be attributed to traders and brokers who were pressured to increase their earnings in order to increase the value of their respective companies. One of the key issues is to look at the sustainability of the said strategy. Shareholders and corporate executives should learn the lessons of 2008 because when short term goals are allowed to supersede the long-term mission of the organization, it is easy for hirelings or people that only took the job because they have been assured of a hefty pay to think only how they could benefit in the short run without ever considering the long-term impact of their actions. According to a famous saying, it is lunacy when people keep in doing the same thing over and over again while anticipating different results each and every time.
Merrill Lynch’s Incentive Strategy
The way the company designed the bonus scheme as well as the significant signing bonus has revealed the organization’s incentive and sorting strategy. The sorting effect of the said incentive device made it possible for the organization to focus its attention on top brokers (Wolfson & Epstein, 2013). As a result, top brokers from other firms are greatly attracted by this bonus scheme. It can be argued that news of the incentive strategy travels fast through the personal networks within the financial industry. It will not take a long time before top traders will learn about the incentive package, and then, they will initiate the necessary steps required to receive an offer of employment from Merrill Lynch.
Changes in the incentive strategy mean that the company is no longer an attractive option for top brokers looking to work for a new employer. At the same time, talented and highly successful brokers who are currently employed at Merrill Lynch will reconsider their long-term commitment to the company. Consequently, Merrill Lynch will have a hard time retaining top caliber brokers.
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At the end, the true winners are the brokers with lucrative compensation packages and the firms that have been able to earn more due to the hiring of top caliber brokers. The losers are the firms that have been unable to attract the best available talent on the market and the firms that have been unable to recoup their investment even after spending a great deal of money chasing after talented brokers. It is imperative for corporate leaders and shareholders to rethink their support on a short-term strategy that forces them to not differentiate their risks when they put all hopes in their top brokers. They need to develop strategies that require total team effort from the executives to the rank and file employee.
