GUEST COMMENT: Why it is perfectly acceptable to pay traders well
There is nothing wrong with high pay for high performance. A top trader is a highly prized asset, so firms naturally compete for the best in the talent pool by offering high pay packages.
There is also nothing wrong with giving traders incentives to make profit for the firm. Firms should align traders’ incentives with their interests. That could mean that traders are punished for their losses or rewarded for long-term performance – those are decisions for Boards to take. If firms implement pay structures which encourage traders to take excessive risks, they will have to pay for the consequences themselves.
What is unacceptable – and what regulation must therefore prevent - is situations in which traders’ incentives create systemic risk. For example, if a globally interconnected institution is highly leveraged and exposed to risk, there is a danger that its failure could bring down large parts of the financial system, taking depositors’ and taxpayers’ money with it.
Lehman Brothers was a case in point. I believe that there is a role for regulation in preventing this sort of situation. But the majority of traders are nowhere near large enough to pose a systemic risk.
Stuart Fraser is Chairman of the Policy & Resources Committee at the City of London Corporation
