Wednesday, 11 February 2009

Toxic bonus

There was a joke doing the rounds in the City last year, which played on bankers’ annual bonus worries. The credit crunch had struck and expectations were low. In lieu of a fat wedge, it was said, City employees could this year expect the deeds to a repossessed Hicksville ranch. In retrospect, of course, not such a bad offer. But maybe if traders were, as the Americans say, forced to eat their own dog food, we wouldn’t have got ourselves into this mess in the first place. Here’s an interesting twist from credit crunch blog, The Baseline Scenario:

“Why not say that all bank [bonuses] above a baseline amount - say, $150,000 in annual salary – [have] to be paid in toxic assets off the bank’s balance sheet?

Instead of getting a check for $10,000, the employee would get $10,000 in toxic assets, at their current book value. That would get the assets off the bank’s balance sheet, and into the hands of the people responsible for putting them there - at the value that they insist they are worth.

Of course, the average employee does not get to set the balance sheet value of the assets… but think about the incentives: talented people will flow to the companies that are valuing their assets the most realistically (since inflated valuations translate directly into lower compensation), which will give companies the incentive to be realistic in their valuations.

Banks could inflate their nominal compensation amounts to compensate for their overvalued assets, but then they would have to take larger losses on their income statements.”

Great idea. I’d set the basic salary bar a little higher, though. We want to see directors and unit heads carrying the can, not flunkies. How does that Pedigree Chum taste, Sir Fred?

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