Question

Barclays is a London based multinational banking company that employs 140,000 employees. The company’s revenue drastically decreased in 2012 ($53 billion) with a yearend deficit of $1.7 million. Later in 2012, Anthony Jenkins was appointed the new CEO in order to turn things around for Barclays so as to regain the trust of their investors and therein increase the profitability of the firm. In 2013, Barclays did achieve a positive net income of $890 million with sales growth of over 9% yet stockholders demanded far greater results. [5] Why did the bank experience so a huge downturn and what did Jenkins to try to turn the bank quickly around? One way a bank can boost their profits is by selling more financial products and services including new bank accounts, credit cards, life insurance, financial advising services or mortgages to existing customers; cross selling. In order to cross sell these products and services Banks require employees with skills in promotion and direct marketing. Banks, not unlike other firms, uses individual-performance based bonuses and commissions to reinforce customer cross selling. This type of incentive pay increases employee motivation and positively impacts their sales performance. [6] Historically Barclays’ was productive in cross sell its products to its customers until they initiated employee pay cuts in 2012 in order to generate more short term profit. In return, Barclays started losing its most valuable employees - even at senior level positions. Newly appointed CEO Jenkins decided to increase sales force salaries in 2013, but the plan failed to increase profits to desired levels. These actions came on the heels of government investigations of the bank’s possible manipulation of interest and foreign exchange rates. [2] Watching the most skilled employees leave was no longer acceptable to Jenkins. In response to low profits and returns Jenkins felt the need to take more radical actions in the first quarter of 2014 while bearing in mind the long-term interests of the shareholders. In order to increase performance and keep the best employees, compensation had increase to more competitive levels. In early in 2014, the median amount of granted incentives was around $30,000 for its 130,000 employees [1] funded by a 10% increase in the bonus bank – the pool of funds reaching to $4 billion by the end of 2014. [3] These increased incentives did not come without a price tag. In order to generate sustainable returns to shareholders and satisfy the board of directors, Jenkins decided he had to lay off employees - perhaps the hardest decision he ever had to make. More than 10,000 employees were going to be laid off to fund the bonus pool. The British government was quite concerned about such massive layoffs and suggested that the situation could be better managed by deferring these bonuses. Jenkins rejected their deferral plan since employees would not receive their bonus for another 10 years, a ludicrous amount of time to ask employees to wait. Timely bonuses and incentives were essential in cross selling products for Barclays and as long as Barclays properly motivated their sales force the firm would generate higher profits; profits it could later employ to rehire some of their former employees. [3]

Develop a preliminary individual performance-based incentive plan that you think best suits cross-selling. Why?

Answer 1

Solution -

Cross-selling is an effective way to increase the profits and income sources of the bank. This has been clearly mentioned and communicated through the article but what is more important here is to read between the lines that while Barclays was concentrating on cross-sell and was shelling out bonuses, there was a downturn in the economy that led to the proposal of layoffs. Jenkins obviously was concentrated on Sustainable growth of the bottom line and hence was not ready to differ the bonuses. In such a scenario it is necessary that cross-selling income should be directly proportional to the bonuses being paid out. The other aspect that is required to be pointed out is that it is this cross-selling income which is also providing for other losses from other functions of the bank and hence the bonuses which are also going out as an expense from the cross-selling income makes it even more pertinent ensure proper accounting and having a sustainable performance-based investment plan.

For a sustainable performance-based investment plan, it is necessary to have the right budgets in place. Once that is done, it is necessary to have a differentiated plan which can ensure higher cross selling income and is duly incentivized. To have a sustainable incentive plan it is necessary that one estimates the revenues that will be generated by the sales for which the incentive is paid out.

The optimum ratio for an incentive plan in the financial industry is 2% of the sales figures assuming that 10% is the margin so the bank effectively earns 8% on every sale. This is not a golden rule that fits all sales instances hence one will have to evolve and modify such incentive plans to provide a comprehensive sustainable incentive plan for the bank in the long run but what is important here is that the incentive paid should earn at least 4 times the profits. This will ensure your sustainable growth for the bank as well as keep the employee morale high.