Neu Leonstein
15-10-2008, 09:09
The first thread on this topic ended up being on CEO wages and bonuses in principle, this one aims to be more focused on the way banker pay (and that includes CEOs only on the periphery) contributed to the crisis and how it could be improved.
I just read this article: http://www.businessspectator.com.au/bs.nsf/Article/Crashing-back-to-earth-KF8XL?OpenDocument&src=sph
Crashing back to earth
The salaries of future generations of investment bankers are unlikely to reach the rarefied heights of the sub-prime years now that their businesses are being underwritten by the tax payer.
One section was particularly good, because it explains an important point very simply:
[...]
Earlier this year UBS, which has lost something around $US50 billion from its involvement in the sub-prime meltdown, issued an explanation for the breakdown in its risk management system to its shareholders.
Among the many factors that combined to destabilise the bank that the report identified was its compensation and incentive structures. UBS said they didn’t effectively differentiate between the creation of alpha (a return greater than that available from the market and therefore an excess return attributable to the executives) and returns available purely as a result of its low cost of funding.
That encouraged executives to pursue what were essentially carry trades, using its low cost of funds to invest in the relatively high-yielding sub-prime assets. There was little recognition of risk issues or adjustment for risk in the incentive arrangements and, indeed, there were incentives to pursue concentrated risk in higher-yielding (and therefore, presumably more risk) assets.
The executives’ incentives weren’t directly affected by the long-term development of the positions they were creating. No formal account was taken of the quality or sustainability of the earnings on which bonuses were paid.
[...]
The Economist argued a similar thing in a report that came out several months before the Lehman collapse.
Make them pay (http://www.economist.com/specialreports/displaystory.cfm?story_id=11325420)
Tightrope artists (http://www.economist.com/specialreports/displaystory.cfm?story_id=11325408)
And if you want to know more about bank internal mechanics that led to a failure to pick up what was going on, this is also a good place to start: Professionally gloomy (http://www.economist.com/surveys/displaystory.cfm?story_id=11325440)
So what do you think should be changed? More meaningfully, how would you change it? Does the overall amount matter, or is it simply a question of the evaluation measures used to determine performance being out of whack?
I just read this article: http://www.businessspectator.com.au/bs.nsf/Article/Crashing-back-to-earth-KF8XL?OpenDocument&src=sph
Crashing back to earth
The salaries of future generations of investment bankers are unlikely to reach the rarefied heights of the sub-prime years now that their businesses are being underwritten by the tax payer.
One section was particularly good, because it explains an important point very simply:
[...]
Earlier this year UBS, which has lost something around $US50 billion from its involvement in the sub-prime meltdown, issued an explanation for the breakdown in its risk management system to its shareholders.
Among the many factors that combined to destabilise the bank that the report identified was its compensation and incentive structures. UBS said they didn’t effectively differentiate between the creation of alpha (a return greater than that available from the market and therefore an excess return attributable to the executives) and returns available purely as a result of its low cost of funding.
That encouraged executives to pursue what were essentially carry trades, using its low cost of funds to invest in the relatively high-yielding sub-prime assets. There was little recognition of risk issues or adjustment for risk in the incentive arrangements and, indeed, there were incentives to pursue concentrated risk in higher-yielding (and therefore, presumably more risk) assets.
The executives’ incentives weren’t directly affected by the long-term development of the positions they were creating. No formal account was taken of the quality or sustainability of the earnings on which bonuses were paid.
[...]
The Economist argued a similar thing in a report that came out several months before the Lehman collapse.
Make them pay (http://www.economist.com/specialreports/displaystory.cfm?story_id=11325420)
Tightrope artists (http://www.economist.com/specialreports/displaystory.cfm?story_id=11325408)
And if you want to know more about bank internal mechanics that led to a failure to pick up what was going on, this is also a good place to start: Professionally gloomy (http://www.economist.com/surveys/displaystory.cfm?story_id=11325440)
So what do you think should be changed? More meaningfully, how would you change it? Does the overall amount matter, or is it simply a question of the evaluation measures used to determine performance being out of whack?