Does Wall Street Need a 'Compensation Code?'

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On Wall Street, no subject is more emotionally charged than compensation. Is the bonus system ailing? Even if it is - could a cure be fashioned that wouldn't be worse than the disease?

A group of high-level financiers, regulators and central bankers reportedly plans to present a plan that would make most investment banks overhaul their compensation structures. The goal is to dampen the current system's "asymmetric" incentives, which some officials believe encourage overly risky activities. Reform proponents would like to see a compensation model that not only rewards people who create initially profitable products or positions, but also penalizes those whose activities end up saddling their employers with losses some time later.

While no further details about the plan have come out since the Institute of International Finance met in Brazil last week, the issue could return to the spotlight at April's Group of Seven meeting. That's when the when the Financial Stability Forum - a global organization of bank regulators - will present its recommendations for reforms to correct structural weaknesses that led to the current debt crisis. Any proposals that emerge from the IIF will be forwarded to the regulators' group for possible inclusion in its final report to the Group of Seven.

Individuals associated with the IIF who want to consider a compensation "best practices" code as a way to curtail excessive risk-taking include Deutsche Bank Chairman Josef Ackermann and Swiss National Bank Vice Chairman Philipp Hildebrand.

What do you think? Does Wall Street pay need to be tethered to long-term performance measures, in order to discourage bankers and traders from actions that enrich them now but can be expected to cause big losses somewhere down the line? Or is it the height of folly to tinker with the bonus system and think that any recommendations could be adopted industry-wide?

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