May 19, 2011
It is a no brainer to tie pay to a person's work on creating long-term value (rather than short-term risk, which is it now). We lost half our savings in the last couple of years because of the wall street meltdown. We did everything right, and we even followed our investment brokers' advice (Merrill Lynch!). We lost half, but did they? No. Did my college friends at Lehman Brothers? No. They got huge bonuses.
Use a *safety index* for incentive compensation, instead of a profit index. Most bankers receive stock options, so if they can generate more profits, the stock price goes up, and their options become more valuable.
Instead, the bank’s bond price measures the overall ability of the bank to repay its own debt is a better measure of value. Another measure of bank stability is the spread on credit default swaps (the insurance-like policies that are essentially bets, where one gambler bets with another that a particular firm will fail). The closer a bank comes to failing (such as in failing to pay of its bond debt), the bigger the spread on credit default swaps.
Thank you for considering my comment,
G Burton