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Thursday, 11 March 2010

Five reasons why the foreign banks pay more than the locals

The author is a senior banker based in Singapore, with three decades in commercial and investment banking at major international firms.

My nephew, who works for a major foreign bank in Singapore, laments endlessly about the tremendous working pressure and stress which he faces daily. He talks about aggressive and unrealistic revenue targets, unfair head office politics and unreasonable expat bosses.

He remembers his early years with a local bank when he had more time for his family, friends and leisure activities. And he always says that one day soon, his wish is to “retire” in a local bank.

Despite the above, I understand that my nephew has declined numerous opportunities to be interviewed for senior positions in the local banks. His predicament is understandable. His compensation from his years with a foreign bank has enabled ownership of an upmarket condominium and a new BMW, and has allowed him to play golf on weekends and dine at the finest restaurants in Singapore.

The pay and lifestyle in a foreign bank are just too hard to give up. Deep down, I think he realises that there is no such thing as a free lunch and he has to deliver what his employers pay him for.

In the last few years, however, the compensation gap has narrowed because of the growing sophistication of the local banks and their moves to retain/hire top talent from foreign firms at quite senior levels. But it still exists and here are five reasons why:

1. Obsession with lower FTEs/headcount

Almost every foreign bank I know appears obsessed with keeping FTEs ("full time employees") to a minimum where possible. They prefer to hire more qualified senior staff who are productive immediately. Administrative tasks are usually subcontracted outside the bank.

Many managers have a larger number of direct reports and are required to continue to generate revenue. Head office charges are also levied on a per-FTE basis, as are most performance measures. Staff are required to multi-task and hiring takes place only when absolutely necessary.

Local banks, however, seem to thrive on having large numbers of staff at many levels. These employees are given very well defined boundaries and work responsibilities. There are also many long-serving middle managers (who are basically just managing other managers or checking up on other people's work).

2. Customer segmentation versus volume

Foreign firms focus on specific market segments, higher quality earnings and bigger tickets items, and as such their staff are actually more productive revenue-cost wise.

Local banks tend to cater to almost every customer segment and will need to hire employees at all levels (i.e. fresh trainees all the way to department heads). Smaller customers and smaller deals are handled by more junior staff, regardless of productivity and unit-processing costs.

3. Geographic span/regional coverage

Foreign bankers are normally regionally focused because the domestic market in Singapore may not offer enough big deals to justify having highly paid and qualified specialists. This means more regional coverage and exposure, and perhaps more training stints at head office. And of course it means that foreign banks have to pay premiums for retaining and hiring talent with regional experience.

4. New business acquisition

I recall one VP of a local bank telling me that his firm does not need to hire and pay for top deal makers and revenue generators because every calendar year there will be a significant amount of banking business which will simply walk into the bank's doors. With their dominant market share and many affiliates and associates, new business acquisition is almost automatic.

5. Job insecurity

Foreign banks must also pay a premium for the job insecurity and career uncertainty which they offer. Every couple of years, there will be changes in top management, or in strategic business direction.

Redundancies and job losses occur regardless of individual performance. Positions are continuously restructured and/or redeployed geographically. In addition, expats from head office are normally better thought of and rank more favourably than most local staff.

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