Getting your dosh before you get found out

Here is an interesting suggestion. Professor Raghuram Rajan thinks that high performing investment managers should have part of their bonuses for successful years held back as insurance against their investments bombing in subsequent years. His argument is that a lot of people are rewarded for taking undue risks which pay off in the short term but which can lead to losses a couple of years later. He uses Morgan Stanley’s recent woes as an example:

The managers who blew a big hole in Morgan Stanley’s balance sheet probably earned enormous bonuses in the past….. If Morgan Stanley managed its compensation correctly those bonuses should be clawed back and should be enough to pay those who did well this year without increasing the bonus pool.

It sounds fair enough in theory but Andrew Clavell pours cold water on the idea:

[I]f one firm broke ranks on compensation structures as Rajan suggests, its employees will vapourise, starting with the best, and the firm will be destroyed.

He’s probably right but there is another reason why such a remuneration strategy is unlikely to be implemented anywhere. Even in a buyers labour market where employees had fewer chances to jump ship, managers would not want to bring in a scheme like that suggested by Professor Rajan. If some rewards for high performing employees are to be held back in case their decisions turned out to have been wrong, surely there would be pressure for a similar policy to apply to managers.

In truth, it’s not just city traders who work on this short-term basis. Everyone is at it. From investment banks to the NHS, the name of the game is to make yourself look good by doing something that appears to be making or saving the organisation lots of money, then get the hell out before the chickens come home to roost. As with the managers who blew that hole in Morgan Stanley, there are people in every type of organisation making decisions that look great now but which will jump up and bite their successors in a few years time. You only have to look at the PFI scheme to see an institutionalised example of this behaviour.

Which is why Professor Rajan’s suggestion will probably never see the light of day anywhere. No-one with any power in the organisation would want it to happen. OK, so the Prof’s suggestion might help to reduce risks for the shareholders but since when did anyone give a damn about them?

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