tag:blogger.com,1999:blog-8764541874043694159.post679363917490972006..comments2024-03-29T10:48:38.142+00:00Comments on Coppola Comment: In Defence of Bank BonusesFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-8764541874043694159.post-3110208947200064652011-03-06T12:46:56.388+00:002011-03-06T12:46:56.388+00:00Many Very good points : Risk Capital / Buy & h...Many Very good points : Risk Capital / Buy & hold / Invest-not-save . But Financial & Corporate Market Activity - focused on value creation & boosting RoE based on S-T indicators will shrink And it should do so, as we become increasingly active investors/ participants in Productive Society that adds- not just strips - value. We must also ensure OUR agents (Pension Funds, Boards, Elected representatives) focus, not on unsustainable & costly to Society RoE but on Sustainable Risk-Adjusted Return on Capital.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-53447642337087139222011-03-01T16:34:11.235+00:002011-03-01T16:34:11.235+00:00Yes, that's a fair point. Position trading doe...Yes, that's a fair point. Position trading does require end-to-end risk management whereas Walford market generally doesn't, and of course the potential losses are far greater as well. However, the MINDSET of bank traders is definitely Walford market - and therein lies the problem.<br /><br />I've worked with traders. Some care about the risks they are running, but a lot don't care about their risks if the potential loss will be incurred by a different desk. They need to carry risks PERSONALLY in order for them to be remotely interested.<br /><br />Personally I think most traders would be fine with clawback of cash bonuses - it's language they understand: if they make loadsamoney, they buy a Porsche, but if they lose loadsamoney the Porsche has to go. I don't have a problem with clawback of cash bonuses to traders, and the threat of this might force them to take more notice of the risks they are running. Interestingly among the EU new rules on bank bonuses is provision for regulators to claw back bonuses where losses occur after payment.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-31578094176088243592011-03-01T11:58:38.598+00:002011-03-01T11:58:38.598+00:00I'm not entirely convinced that the salesman a...I'm not entirely convinced that the salesman analogy is necessarily the correct one.<br /><br />For starters, in a company of any real size, ordinarily a salesman is not responsible for the quality of the product that they are selling, which is handled elsewhere and rewarded appropriately. They will be given a product and will be rewarded based on how effectively they sell it - failure results in either low margins, or unsold stock.<br /><br />Traders on the other hand are responsible for buying and selling magic widgets whose value at any point in time is often speculative. Assuming (in the most simple form) that their transactions come in pairs (buy/sell or short-sell/buy), part-way through any pair of transactions there's a risk of loss of capital investment. That's a level of end-to-end responsibility that doesn't exist in a normal salesman's role, so it doesn't naturally follow that the same rules ought to apply.<br /><br />Paying commission on profits generated by gambling with capital is an inherently flawed mechanism, because it's uneven. The tax example (offsetting last year's loss against this year's profit) works here - over the course of a decade, a company will have paid the appropriate amount of tax on their aggregate profit, even if the tax paid in any individual year doesn't look right. Say I employ two traders, on 1% commission - one makes £1,000 and one loses £1,000. My aggregate profit position is break-even, but I'm paying out £10 bonus to the good trader, and effectively capping the bonus for the bad trader at a bottom level of £0.<br /><br />Without an effective concept of clawback (which we both know wouldn't work because traders are motivated by short term remuneration), the commission model fails to factor in the risk element of the role, and isn't fit for purpose.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-54620257105391687742011-02-27T23:19:13.391+00:002011-02-27T23:19:13.391+00:00I need to do some homework on Hutton.
As for gov...I need to do some homework on Hutton. <br /><br />As for government guilt, yes the government should carry a large share of the blame. New Labour turned its back on regulation and backed the City to generate the growth to fund its more progressive social reforms. Obviously that plan backfired. <br /><br />Is the City so good for us? It seems to me that the destabilising effects of the City outweigh many of the benefits. The high returns suck talent and investment from other areas of the country and sectors of the economy. Our investment record in manufacturing is dreadful and gets worse with each recession and the IFS are warning that we are losing market share despite the low £. Giving the financial sector even more power! <br /><br />Professor Richard Layard at LSE has done some interesting work on the economics of happiness (we should be a bit poorer but a lot happier)and the OECD are now promoting the benefits of more equal distribution of wealth. Even Cameron dismissed the 'trickle down effect' when he was in opposition. Let the bankers who don't want to stay chase higher salaries in other countries. There is a brief discussion in this post: http://canthingsonlygetbetter.blogspot.com/2010/11/this-blog-might-change-your-life.htmlJoehttps://www.blogger.com/profile/12228526035440751995noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-53797543448436339072011-02-27T21:02:21.567+00:002011-02-27T21:02:21.567+00:00Thanks Joseph. This is exactly the kind of debate ...Thanks Joseph. This is exactly the kind of debate I wanted to initiate.<br />I included a link to the Hutton Report because it spends considerable time discussing the relationship between pay related to the JOB ITSELF and pay related to PERFORMANCE IN THE JOB. It concludes that senior salaries should contain an element of both. I think that this is a useful model for bank senior execs remuneration as well. My concern is that very large basic pay packages render the performance element irrelevant. The bankers who presided over the collapse of HBOS and RBS among others had salaries so large as to eclipse the performance related element almost completely - in effect a flat salary. Very evidently this failed to prevent them making a complete hash of their management responsibilities. I am suggesting massively cutting their base pay so that the performance element is more significant, which might give them more incentive to do their jobs a bit better. I do agree though that this could lead to risky decisions to inflate the share price.<br /><br />The jury is out, currently, on separate retail and investment banks. I am personally not convinced that separate legal institutions are necessary, but there should be "chinese walls" to director level preventing cross-subsidy from retail to investment and vice versa. Hedge transactions and market trades on behalf of high net worth individuals should be done at arms-length - back to back transactions. This would be good practice now anyway. There should also be completely separate regulation of retail (clearing) banking and investment banking - two separate independent bodies are required. The FSA and BoE are utterly inadequate to this task.<br /><br />As always, we keep pointing the finger at the offending banks, without seeing the joint culpability of government in their offences.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-34132030538649488522011-02-27T14:14:19.685+00:002011-02-27T14:14:19.685+00:00Very intersting article and comments. Thanks. Payi...Very intersting article and comments. Thanks. Paying bonuses in the form of equity can also lead to risky decisions to artificially inflate the share price. I agree with SK on bonuses. Wouldn't a flat salary place a burden on institutions to introduce the management qualities you discuss? <br /><br />As far as reducing banking stranglehold on economy: wouldn't a return to seperate retail and investment banks go a long way to achieving that?Joehttps://www.blogger.com/profile/12228526035440751995noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-8322833709169191682011-02-26T21:02:32.659+00:002011-02-26T21:02:32.659+00:00I do think that the stranglehold that the banking ...I do think that the stranglehold that the banking industry has on the economy needs to be released. But that is a matter for government. And maybe we will end up recognising retail banking, at any rate, as the public service that it has now become - we can't do without it - and regulating it like other public services in private hands. Roll on OFFIN!Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-43691700318101176332011-02-26T20:50:42.167+00:002011-02-26T20:50:42.167+00:00Many good points here, Steve - thank you. I agree ...Many good points here, Steve - thank you. I agree that the high bonus culture did drive excessively risky behaviour by traders. However, it was a failure of management and regulation - and especially internal financial control within banks - that led to them being allowed to take these risks at all. Restricting traders' bonuses doesn't address the management failures. It's the equivalent of shooting the messenger.<br />Re exec pay - yes, I agree that the "talent pool" is ridiculously restricted and even incestuous. But the Hutton report on senior local government pay made EXACTLY the same point about chief execs of local authorities. Clearly this problem isn't limited to banks. My other point was that it is normal in all industries, and increasingly in the public sector too, for senior exec pay to include a performance-related element. There may well be a case for senior execs in all industries to be simply paid for their job, as you suggest, rather than all this performance-related stuff. But there is no reason to single out bank execs in this respect.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.com