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Does Wall Street Need a 'Compensation Code?'

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?

Post your views below.

AUTHOReFinancialCareers News Insider Comment
  • St
    Steven C.
    11 June 2008

    Do you want free enterprise and open markets?
    Or are you letting your personal underperformance feed your jealousy?
    I bet you'd take every penny if you were offered what these execs earn. But, then again you're not being offered those salaries, are you?
    Socialism, liberalism, criticism always seems to come from the lower earning people...Hummmm.

  • St
    Steven C
    11 June 2008

    filtering of comments to create only left leaning impressions...why am I not surprised!

  • Sh
    Shawn S.
    28 March 2008

    Where would be the incentive to work 80-100+ hour weeks? If anything, a company should maybe start to pay employees and managers in stock at some given level. This would require the investment bankers to do projects that add value to the firm and shareholders. Less risky deals would be completed in my mind if a person's salary is tied to their companies stock price instead of cash.

  • Jo
    27 March 2008

    Rediculous amounts of money some of these top executives earn. And some of them at our expense. Why are oil prices so high? Hummm. Who reaps the rewards? As for most of the other firms, it seems unfair that the top execs just keep raking in the dough which has considerably affected a level playing field for most others.

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