GUEST COMMENT: Let the market decide the appropriate level for bonuses

9 September 2009

2 minute read

GUEST COMMENT: Let the market decide the appropriate level for bonuses

The phenomenon of world leaders debating investment banking bonuses is nothing new. During the last G20 meeting in London, it was agreed that each G20 country should develop a code of practice specifying how financial services compensation in their territory should be regulated by the end of the year. In the intervening months, the FSA has developed a code of practice for compensation, as have a small number of others, including draft codes from the Swiss regulator and the Australian regulator.

However, before the FSA's code has even been implemented or organizations have been reviewed to see whether they are in line with its recommendations, the bonus issue has been revisited by politicians.

Financial services firms need to pay for performance. This means paying the right amount for the right return and aligning compensation with the risk taken to generate that return. Looking at how bonuses are determined and structured and enforcing the regulations will maximise the chances of achieving this. Capping bonuses is not the answer.

The ultimate arbiters of compensation policies are shareholders. It's worth remembering that before the financial crisis struck, compensation costs were fairly static from year to year (at about 50% of revenues for the large organisations). There was no need to impose a cap - the market decided the correct compensation ratio.

In advance of the next G20 meeting, it would be nice if a few more regulators came up with concrete proposals on how to structure bonuses. We may then be able to have a rational debate, instead of one driven by political noise and talk of bonus caps.

AUTHORJon Terry

Insider Comment

ke
kela
9 September 2009
@djm
are you an accountant? coz you sound like one
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dj
djm
9 September 2009
Mr. or Mme. Assets,
...and in stopping after the title you've completely missed the point. Mr. Terry is differenciating between LEVELS and STRUCTURES. He is saying that there is a legitimate question when it comes to structuring compensation policies to align the interests of employees with those of shareholders (or possibly stakeholders more generally). Indeed, it is his profession.
But attempting the set the levels of compensation simply brings us back to an era of wage and price controls, doomed to failure as has been previously the case. Nor does this work even as a ratio: in some industries, labour eats up the bulk of costs. In others, it is more tilted to capital. It is the market's job to set that level.
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Da
Davros
9 September 2009
Shareholders have proven themselves to be dust covered silent partners entirely uninterested in exercising their rights to veto pay and overall corporate culture leaving C level execs free to extract as much as is legally possible. Maybe if banks hadn't been paying 50% in comp costs during the boom they would have had much stronger balance sheets and not required bailouts?
What about paying C level pensions only in stock for perpetuity. Thats what I would call having skin in the game.
And lets be honest you're the head of reward at one of the big 4. You can't really say anything other that 'Bankers are great and deserve to be paid lots' lest you lose a tasty engagement.
Additionally...
http://www.ted.com/talks/da...
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Al
Alternative Assets
9 September 2009
I couldn't even go further than the title....
Seriously, who are you kidding?
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