How Big Should Stock Market Bonuses Be?Summary: How do - and more importantly - how should stock market professionals earn their money? What are fair stock market bonuses? This is a very important question that has been brought into greater focus by the collapse of much of Wall Street and the global financial system in late 2008. 
Seeing investment banking staff being paid bonuses in the millions of dollars when the companies that they were managing, representing and trading for needed government bailouts was a sobering and quite distasteful sight.One perfectly good question would be to ask whether a hedge fund manager - no matter how skilled and successful - is worth US$100 million + per year? What do you think? But, it has to be said that being paid for outstanding results is an attractive model. However, many in the hedge fund industry seem to be there simply to earn a lot. Perhaps that is the jealous typing of your author, perhaps not. Their system of 2 to 2.5% per annum in management fee plus a performance related bonus that can be in the 20-25% region can provide for massive rewards. Imagine having a good year and outperforming your benchmark index with a billion dollars under management! The problem is that in the down years, high fees from previous years cannot be clawed back. It is a one way street. This can put the investor at a serious disadvantage. In contrast, being paid to not generate results must surely be worse. Perhaps this - and envy - were the real factors making those massive bonuses amongst a stock market collapse seem so distasteful. After all, in the good times, there were far less questions being asked about remuneration...
He speaks to one hedge fund manager, formerly a broker, who says this: "I have an issue with my old job, because, in difficult markets like we have at present,if I put a hundred grand with a broker, and now the stock market's down 40 per cent, if my broker's performed in line with the market, then my hundred grand's now sixty grand - but the broker's still trading. And I think to myself, he's got clients losing money but he's still earning commission." He continues, Some brokers will actually earn more money than me this year, but aren't making money for their clients. I think that's an absolute con. There are brokers out there who will say, "It's the 29th of October, I haven't done much commission this month, so I'll switch my clients out of Invensys and into Vodafone and make five grand commission." That's criminal - we've seen it in full flow. The fact that [a broker friend] is saying he had his best ever month when his clients are losing fortunes means there's something wrong. I think the whole city should be performance-related." Later in the book, he interviews a City lawyer who says, "The structural error was the reward system in the City. The reward system meant that both the institutions and individuals were never in a position where they personally paid the price for things going wrong. If things went wrong, then the government would come in and bail out the institution, and if you were very unlucky, you might lose your job. But at a personal level,if you have a bonus culture where people get bonuses which are huge irrespective of whether they are performing well, whether they've made disastrous decisions or not, then all the impetus is in maximising that short-term profit, knowing that you will never be in a position where you will have to carry the can."
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What Do You Think About Stock Market Bonuses?
Do you think that the bonuses are too high? Are traders and fund managers worth the money? Or do you think that we need a new form of capitalism in the stock markets of the world? What Other Visitors Have SaidClick below to see contributions from other visitors to this page...
Why not pay by results?
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