Bankers Bawl: Best Practices to Reduce Compensation

The Institute of International Finance has released its Final Report by its Committee on Market Best Practices.

Although it is too little, too late for many finance professionals who might not ever re-enter their chosen profession, the report addresses the nettlesome issue of bankers compensation. Based on comments by Dr. Josef Ackermann, Chairman of the IIF Board of Directors and Chairman of the Management Board and the Group Executive Committee of Deutsche Bank AG, it appears compensation might not return to 2006-’07 levels anytime soon, even if the business climate improves:

“Incentive pay was one of the weaknesses in business practices, and will require the industry to exercise greater self-discipline on compensation-related issues.” He added, “We are convinced that adoption of the Principles on Compensation that we have set out will play a meaningful role in strengthening our industry and ultimately public confidence.”5

* Compensation incentives should be based on performance and should be aligned with shareholder interests and long-term, firm-wide profitability, taking into account overall risk and the cost of capital;
* Compensation incentives should not induce risk-taking in excess of the firm’s risk appetite; and
* Firms should take into account the performance realized for shareholders over time in determining severance pay.

SellSide equity research departments might be particularly hard hit by the practice; Brad Hintz recently claimed than when he was CFO of Lehman Brothers the department clearly lost money. Complex transfer pricing to allocate part of the investment banking and sales and trading revenue to equity research might help at the margin, but these proposals might continue to pressure the business models at many banks.

A longtime, well respected steel analyst is thriving with her independent research effort; courting hedge funds and playing them off against each other has allowed her to charge 70 buyside clients 60k each, a pittance for the alternative managers who cannot afford to miss a market moving call from an analyst who does not appear on First Call.

There is still money to be made, but Sellsiders might have to get a little more entrepreneurial about it.

And soon.

Global Finance Leaders Release Comprehensive Proposals to Strengthen the Financial Industry and Financial Markets
The Institute of International Finance
----------------------------------------------------------------------------------------------------------
The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Comments:

<< Back to main