The Front Office

[nothing new]

"...May help in some ways but not all..."

But a step in the right direction of de-linking the incentive to increase bonus at all cost and above all else - including unethical practices and outright fraud that results in painful consequences for everyone else  BUT the front office

"...higher fixed costs are not good in a cyclical business, will increase the fire and hire mentality..."

Then why doesn't the front office use all their intellectual capacity to devise a pay mechanism where you don't have to fire everyone, keep the legitimate honest, productive employees and jettisons the parasites?

[nothing new again]

"...May help in some ways but not all..."

But a step in the right direction of de-linking the incentive to increase bonus at all cost and above all else - including unethical practices and outright fraud that results in painful consequences for everyone else  BUT the front office

"...higher fixed costs are not good in a cyclical business, will increase the fire and hire mentality..."

Then why doesn't the front office use all their intellectual capacity to devise a pay mechanism where you don't have to fire everyone, keep the legitimate honest, productive employees and jettisons the parasites?

Parasites would be those not earning money?

I'd suggest risk weighting p&l before basing remuneration on it.  Both in terms of absolute risk and type taken.  I still think there should be a strong linkage between revenue generation and pay (and that is not limited to banks).

End of the day the bank wants people to make profits, having no incentive to do so is not the answer.  You want them to do it responsibly though and without betting the farm, risk weighting of returns can recognise that.

[Pripps]

I'd suggest risk weighting p&l before basing remuneration on it.  Both in terms of absolute risk and type taken.  I still think there should be a strong linkage between revenue generation and pay (and that is not limited to banks).

so people like scientists they should have smaller salaries than people who sell hot dogs? some professions just don't have any causal linkage to revenue.

[nothing new again]

Tough, you generally get paid money for making it.

To be more constructive, what sort of scientist.  I knew a profeesor of glycobiology who got seriously rich thanks to monsanto paying him to research certain things, why do you think they did that?

[Vulcanl]

I wonder when exactly these people will finally 'get' it.  They are setting themselves up for legislation intended expressly to limit these excessive paydays:

New York Times
Big Banks Paid Billions in Bonuses Amid Wall St. Crisis Sign in to Published: July 30, 2009

Thousands of top traders and bankers on Wall Street were awarded huge bonuses and pay packages last year, even as their employers were battered by the financial crisis.

At Goldman Sachs, for example, bonuses of more than $1 million went to 953 traders and bankers, and Morgan Stanley awarded seven-figure bonuses to 428 employees. Even at weaker banks like Citigroup and Bank of America, million-dollar awards were distributed to hundreds of workers.

The report is certain to intensify the growing debate over how, and how much, Wall Street bankers should be paid.

In January, President Obama called financial institutions “shameful” for giving themselves nearly $20 billion in bonuses as the economy was faltering and the government was spending billions to bail out financial institutions.

On Friday, the House of Representatives may vote on a bill that would order bank regulators to restrict “inappropriate or imprudently risky” pay packages at larger banks.

Mr. Cuomo, who for months has criticized the companies over pay, said the bonuses were particularly galling because the banks survived the crisis with the government’s support.

“If the bank lost money, where do you get the money to pay the bonus?” he said.

All the banks named in the report declined to comment.

Mr. Cuomo’s stance — that compensation for every employee in a financial firm should rise and fall in line with the company’s overall results — is not shared on Wall Street, which tends to reward employees based more on their individual performance. Otherwise, the thinking goes, top workers could easily leave for another firm that would reward them more directly for their personal contribution.

Many banks partly base their bonuses on overall results, but Mr. Cuomo has said they should do so to a greater degree.

At Morgan Stanley, for example, compensation last year was more than seven times as large as the bank’s profit. In 2004 and 2005, when the stock markets were doing well, Morgan Stanley spent only two times its profits on compensation.

Robert A. Profusek, a lawyer with the law firm Jones Day, which works with many of the large banks, said bank executives and *** spent considerable time deciding bonuses based on the value of workers to their companies.

“There’s this assumption that everyone was like drunken sailors passing out money without regard to the consequences or without giving it any thought,” Mr. Profusek said. “That wasn’t the case.”

Mr. Cuomo’s office did not study the correlation between all of the individual bonuses and the performance of the people who received them.

Congressional leaders have introduced several other bills aimed at reining in the bank bonus culture. Federal regulators and a new government pay czar, Kenneth Feinberg, are also scrutinizing bank bonuses, which have fueled populist outrage. Incentives that led to large bonuses on Wall Street are often cited as a cause of the financial crisis.

Though it has been known for months that billions of dollars were spent on bonuses last year, it was unclear whether that money was spread widely or concentrated among a few workers.

The report suggests that those roughly 5,000 people — a small subset of the industry — accounted for more than $5 billion in bonuses. At Goldman, just 200 people collectively were paid nearly $1 billion in total, and at Morgan Stanley, $577 million was shared by 101 people.

All told, the bonus pools at the nine banks that received bailout money was $32.6 billion, while those banks lost $81 billion.

Some compensation experts questioned whether the bonuses should have been paid at all while the banks were receiving government aid.

“There are some real ethical questions given the bailouts and the precariousness of so many of these financial institutions,” said Jesse M. Brill, an outspoken pay critic who is the chairman of CompensationStandards.com, a research firm in California. “It’s troublesome that the old ways are so ingrained that it is very hard for them to shed them.”

The report does not include certain other highly paid employees, like brokers who are paid on commission. The report also does not include some bank subsidiaries, like the Phibro commodities trading unit at Citigroup, where one trader stands to collect $100 million for his work last year.

Now that most banks are making money again, hefty bonuses will probably be even more common this year. And many banks have increased salaries among highly paid workers so that they will not depend as heavily on bonuses.

Banks typically do not disclose compensation figures beyond their total compensation expenses and the amounts paid to top five highly paid executives, but they turned over information on their bonus pools to a House committee and to Mr. Cuomo after the bailout last year.

The last few years provide a “virtual laboratory” to test whether bankers’ pay moved in line with bank performance, Mr. Cuomo said. If it did, he said, the pay levels would have dropped off in 2007 and 2008 as bank profits fell.

So far this year, Morgan Stanley has set aside about $7 billion for compensation — which includes salaries, bonuses and expenses like health care — even though it has reported quarterly losses.

At some banks last year, revenue fell to levels not seen in more than five years, but pay did not. At Citigroup, revenue was the lowest since 2002. But the amount the bank spent on compensation was higher than in any other year between 2003 and 2006.

At Bank of America, revenue last year was at the same level as in 2006, and the bank kept the amount it paid to employees in line with 2006. Profit at the bank last year, however, was one-fifth of the level in 2006.

Still, regulators may have limited resources for keeping pay in check. Only banks that still have bailout money are subject to oversight by Mr. Feinberg, the pay czar. He will approve pay for the top 100 compensated employees at banks like Citigroup and Bank of America as well as automakers like General Motors.

[more guff]

More copy paste guff.

I think the better question is when will you get it?

[Vulcanl]

In its blinkered pursuit of profit at all cost The Front Office is sowing the seeds of its own demise.  They are killing the Goose that lays the Golden egg.

Millions of people around the World read stories like the one I have pasted here and are appalled.  They cannot understand and get their heads around how in the World it is possible that The Front Office can think it is acceptable to continue to pay these vast sums to a limited number of recipients.

This will provide ammunition and political cover for people like Barney Frank to lay the hammer down once and for all.

This my friend is what you don't get. 

It is in the Front Office's best interests to be a good citizen. 

Not likely to happen any time soon based on the below.

[more guff]

What you don't get is that people get paid money for making money.

It is pretty simple.

They need to incentivise people according to how they want them to behave.  Change the pay and you change the behaviour.  Risk management is a joke, they just report stuff, they need real teeth.

I agree in some respects, I doubt however you ever meet many of these people as your comprehension of their thinking is way off.

Your continuous blathering about morals isn't the answer.  Change the pay/performance assessment approach.

Fyi, I work in back office valuation/quants, I talk to them a lot.

[Vulcanl]

"...What you don't get is that people get paid money for making money..."

OK, fine.  But if the front office did their job and actually made money for the banks, why did these same banks have to resort to take government money to survive?  What exactly happened to all this money that the front office 'made'?

"...Your continuous blathering about morals isn't the answer..."

Of course it IS the answer as it is all about raising awareness.  What IS the answer then?  Do you want to legislate morality?  Nothing will change in this industry until it collective grows a moral backbone and uses it to guide its decision making

[A very good point]

Let's take your point about legislating morality a bit further. Let's say hypothetically each country proceeded to do so. Based upon your arguement that morals are clearly defined and should be the same the world over one would think, that given such a hypothetical situation, that all laws dveloped would be close to identical. I think not, I think the morals that would be legislated in the various countries would be vastly different.

[Vulcanl]

Wow.  Good questions.  I will do my best:

Firstly, the ideal situation would be one where there is no need for governments to legislate morality, one where each citizen knows the difference between 'right' and 'wrong' and participated in society to the extent that norms arise that encourage 'good' behavior. I am a proponent of smaller government when/where ever possible.

"... Based upon your arguement that morals are clearly defined..."

Morals are universal, and difficult for some of us to identify.  So I wouldn't say they are 'clearly defined' to all.  But universal, yes (concept of right vs wrong, good vs evil). 

" and should be the same the world over one would think, that given such a hypothetical situation, that all laws dveloped would be close to identical..."

This assumes that all of the governments writing these laws are 'good' and well-intentioned governments. 

If so - yes, I would agree with this statement.

[ex-KL]

This will provide ammunition and political cover for people like Barney Frank to lay the hammer down once and for all.

I might be wrong but...... not sure the government would be overly worried about these bonus given they get a sizeable chunk of it straight out the pocket as tax.

Like the multi-million golden parachute of the Porsche boss, i think half went on local and state taxes and he agreed to give half of what was rest to charity.

[Pripps]

This assumes that all of the governments writing these laws are 'good' and well-intentioned governments. 

Define 'good' government.. do you have an example? Because I can't think of any that I would call 'good'

Moral is universal, that much I agree, but highly individual due to beliefs, culture and other factors. When the majority of people share the same view it doesn't guarantee that the moral is universally right/wrong. E.g. if 51% of people think abortion is a matter of womens freedom but 49% find it being murder then it is highly doubtful what is right and wrong. Only each individual can decide in their own case.

law and moral have nothing much to do with each other, they are two different things. I can be lawful but morally wrong and v.v.

[Vulcanl]

“…Define 'good' government.. do you have an example?...”

I think that humanity is still working on this very ideal!!!!  We have been at it for at least several thousand years.  The best I can say is that I hope we are getting closer to it!

“…Moral is universal, that much I agree…”

Cool - agreed

“…but highly individual due to beliefs, culture and other factors...”

I think that what we mean here is ‘values.’  Within degrees of good and evil they help us to identify what matters more and therefore enable us to make decisions

“…When the majority of people share the same view it doesn't guarantee that the moral is universally right/wrong…”

Morals are universal.  They don't change.  If you substitute the word 'moral' for 'values' in this statement I agree.

“….E.g. if 51% of people think abortion is a matter of womens freedom but 49% find it being murder then it is highly doubtful what is right and wrong...”

I disagree, and that is what morals tell us.  To kill a defenseless unborn human being is wrong

“…Only each individual can decide in their own case…”

Again I disagree.  If an individual decided to go out and kill 10 people that he did not personally know, this is considered murder and is clearly wrong, regardless of what the individual decided in their own case

“…law and moral have nothing much to do with each other, they are two different things. I can be lawful but morally wrong and v.v…”

Yes in practice this often happens.  The ideal is that laws always follow morals but it doesn’t always happen

[Pripps]

“….E.g. if 51% of people think abortion is a matter of womens freedom but 49% find it being murder then it is highly doubtful what is right and wrong...”

I disagree, and that is what morals tell us.  To kill a defenseless unborn human being is wrong

No here you are applying your moral values, a young pre-teen girl who was raped may have other ideas of what is right and wrong.

“…Only each individual can decide in their own case…”

Again I disagree.  If an individual decided to go out and kill 10 people that he did not personally know, this is considered murder and is clearly wrong, regardless of what the individual decided in their own case

yes but here again you are applying your values, the suicide bomber and the group he belongs to may have other morals values

We have laws to enforce a certain set of moral values on other people. If there were some global universal moral values that all people follow and which wouldn't differ from person to person then there would be no need for any laws.