Good to see some coverage recently on the issue of businesses taking out interest rate protection policies. It didn’t quite cover all the issues however and as you may expect it painted the banks in a bit of a poor light. The issue about these interest rate contracts (aka SWAPS) is that businesses should not feel forced into them and then, if they decide the principle of the thing is right, that they make sure they get the right deal. Most SWAP contracts are ‘portable’ but also you don’t have to take out a contract with the bank that is issuing with the loan. Clearly as these contracts are profitable to the banks they would want you to use them – but if there is a better deal to be had from, say, NatWest to cover a Lloyds bank loan then that is perfectly possible.

George Osborne & the Bank of England have a dilemma in that whenever they release funds into the system (intending that it will eventually benefit SME’s, as the engine of the economy) there is a gravitational type pull that sees it eventually in the hands of corporates or banks, strengthening their reserves.

Here’s the idea:

Prior to ‘Humpty falling off the Wall’, both RBS and HBoS (subsequently known as HLoSS and now Lloyds) built impressive teams of business development managers to lend to businesses. They were often their very best people and they also headhunted the best from the other banks for this purpose. With the tightening of lending and with pressure on business customers most of these people were ‘redeployed’ to manage portfolios of ‘problem clients’ – a role for which they were not all ideally suited and, as ‘deal do-ers’ they didn’t really enjoy.

Now that many of these problem situations have been resolved (in one way or another!) many of these capable people are looking at redundancy.

So we have a small army of capable professionals who are skilled at appraising a business and a lending proposition (which the BofE don’t have), working for banks that the tax payers own, about to lose their jobs. To use the old expression ‘they are all dressed up with nowhere to go’.

The ‘Credit Easing’ funds could be put into separate ’ringfenced’ pots and placed with RBS and Lloyds – separate from their balance sheets with these people to lend responsibly but without retribution or criticism if the money is lost. These are people who know what makes a bankable proposition and can act responsibly.

If necessary (to avoid a flood of applicants which would detract from the bank’s core business) the application process could be routed only through carefully chosen intermediaries – good brokers also know what is a sensible deal and the exercise could be closely controlled to create a very tight distribution channel for such funding.

What’s the risk? Well the money could be lost as a result of some riskier deals getting done (but the cash will have been ‘spent’ somewhere in the economy) and some bankers may have been kept in their jobs longer than the cost cutting would have allowed (but they will have been productive and not be unemployed). 

The banks could take the credit for this (“we effectively allowed someone else to use our skilled people for the good of the country”) and it would avoid setting up a whole new infrastructure or Government scheme. It would also be very quick to implement.

The banks participating could even be allowed to become the first choice bankers for opening the accounts or even later to ‘cherry pick’ the winners out of this.

Let’s just do it   

A ‘sell-out’ event at Milton Keynes Chamber for the ‘Business Owners are from Mars and Bankers are from ?’ presentation.

Many of the banks will train their managers to understand and deal more effectively with business customers. They have the resources to do that and it helps manage risk. There are not to my knowledge however any courses that help business owners deal more effectively with their bank managers! As I have just joined the Chamber I was pleased to share my knowledge of how the interaction between businesses and bankers can naturally involve tension and misunderstanding – but also (and more importantly) how problems can be avoided and dealt with.

Incentive schemes are a minefield – how do you get them right?

In general people will do what they are paid to do – and the same applies with any bonus structure – the most critical thing is ‘the measures’

I was lucky enough to do some work with an expert on incentive schemes a few years ago. He had loads of examples where they had gone wrong because the measures hadn’t been thought through and didn’t fit with what the company actually wanted to achieve. A good example was the luggage handlers at Heathrow where they measured how long it took to get the first bag off the plane onto the carousel. Easy to see that they only needed a fit, younger lad to grab the first small bag and leg it across the tarmac to qualify for their bonus – the rest of the bags could come off at a more leisurely pace!

Steven Hester is being lambasted – but it is a bit late now when his objectives and measures should have been set in place over a year ago – that was the time to object and get it right. We should now be interested in what his priorities are for 2012 (and beyond of course).

If his measures had been to become a small business lending champion and see that part of the economy invigorated, fuelled by RBS lending, and he had acheived that, then he would now be a hero. We might still have an ideological objection to the scale of the bonus but we could see that he had created the value to justify it it would have a positive feel.

As it was the country, as the majority shareholders, had it decided for them that the corporate priority was restructuring and downsizing – which he has, by all accounts, done well and against the measures set is now qualifiying for the bonus decided as appropriate, probably about two years ago (with consent of all the policiticians now up in arms about it!). However this all has negative connotations for the economy, so it doesn’t feel right. Some shouts have gone up about the fact that he is getting a bonus even though the share price has gone down – well, if that is the case then that should have also been one of his key measures (except it could be argued that the share price is just as much influenced by external factors). 

Many smaller businesses face the same challenge on a different scale. The most obvious one is where you incentive your sales staff to sell more but they can do that at the expense of your gross margin – so you incentivise your staff to wreck the business.

So – get the measures right in line with what you want to achieve, look at what could go wrong and provide against it, then align the bonus against those measures – the amount you then have to pay depends on the going rate and how motivated you want someone to be.