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Jon Moulton on rating bonuses

22 May 2008

Sarah Butcher

FSA chief Hector Sants has come out of the closet and said bonuses should be taken into account when assessing banks’ risk. But we'd like to point out that it wasn’t his idea. Sants seems to have latched onto a notion first aired by Alchemy Partners’ founder Jon Moulton last week.

So how does Jon think the plan Sants has pilfered from him would work?

“I presume you’d need to have some measure of a reasonable level of bonus and an unreasonable level of bonus, based on bonuses as a percentage of salary,” he tells us.

“If the average bonus were 200% of salary that would be considered less desirable than if the average bonus were 100% of salary.”

Sants’ version looks distinctly vague by comparison: he’s threatening to look at “compensation structures that encourage risk-taking”.

More ominous is Sants' intimation that banks paying bonuses deemed excessively risky will be obliged to increase their capital base.

This won’t go down very well at all, says Moulton: “You’ll have mass departures from i-banks if you say that for every 1% increase in bonuses you’ll need a 1% increase in capital,” he predicts.

Comments (4)

  • Banks had to incorporate this bonus scheme to keep their top talent from rushing to hedge funds. The top trading talent will just go to private funds and leave the I-Banks less focused on risky speculation!

    Gforce 22 May 2008

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  • “If the average bonus were 200% of salary that would be considered less desirable than if the average bonus were 100% of salary.”

    genius

    anon 22 May 2008

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  • That's some pretty uninteresting comment by Moulton. Sant's version, although vague, is actually much-more on the ball. To assess banks' risk appetite, one should very much examine the compensation structure of the firm, and on what basis are bonuses/other incentives awarded. For instance, excessive reward for taking on excessive-risks should be discouraged, and possibly penalised at banks, as in a downturn situation, this excessive risks could translate into enormous losses - see Mr Kerviel of SG. Afterall, banks are central to the economy and shouldn't be gambled with. The risk-takers have other vehicles to engage their capital in, such as hedge-funds.

    Interestingly, in Mr Moulton's industry the pay structure incorporates "carry" (kind of share on investment), which is the main incentive and is only realised upon exit of an investment. As such, the investment manager's incentives are tied up to the success of his investments. For brokers, the bonuses represent the main pay-package, and thus, firms would take any losses incurred from the bonus pool of a particular desk, ie. the downside risks is taken into consideration within the pay structure (to an extent).

    PJ 22 May 2008

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  • Is anyone else getting bored Moulton's increasingly ill thought out ramblings?

    A 22 May 2008

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