{"id":1361,"date":"2009-05-28T04:21:41","date_gmt":"2009-05-28T12:21:41","guid":{"rendered":"http:\/\/hodakvalue.com\/blog\/?p=1361"},"modified":"2009-05-28T04:33:53","modified_gmt":"2009-05-28T12:33:53","slug":"its-not-how-much-its-how","status":"publish","type":"post","link":"http:\/\/hodakvalue.com\/blog\/its-not-how-much-its-how\/","title":{"rendered":"“It’s Not How Much You Pay, But How”"},"content":{"rendered":"

Finally, a sensible editorial<\/a> on banking compensation.\u00a0 Alan Blinder waves away the misdirection associated with “how much” bankers have been paid to identify the critical element of “how” they’ve been paid.\u00a0 The answer, as my loyal readers know, is the infamous trader’s option<\/a> and the trader’s supervisor’s option<\/a>.<\/p>\n

Darwinian selection ensures us that these folks are generally smart young people with more than the usual appetite for both money and risk-taking. Unfortunately, their compensation schemes exacerbate these natural tendencies by offering them the following sort of go-for-broke incentives when they place financial bets: Heads, you become richer than Croesus; tails, you get no bonus, receive instead about four times the national average salary, and may (or may not) have to look for a new job. These bright young people are no dummies. Faced with such skewed incentives, they place lots of big bets. If tails come up, OPM will absorb almost all of the losses anyway.<\/p><\/blockquote>\n

Blinder suggests what I would consider timid, but sensible reform directed at exactly the right place–the board of directors.<\/p>\n

The thing we have working against us is incredible, but understandable conservatism on the part of shell-shocked boards that truly can’t distinguish bold, good mechanisms<\/a> from bold, schlock mechanisms<\/a>.\u00a0 I know where they’re coming from.\u00a0 I feel the same way about macroeconomists as I try to get a handle on what’s going on.\u00a0 The thing we have working in our favor is that, the top executives at even public companies actually have a lot<\/a> of skin<\/a> in the game<\/a>, and it’s not just upside.\u00a0 Dick Fuld and Jimmy Cayne didn’t actually want to end up the way they did<\/a>.\u00a0 If they had any idea of the risks they were actually enabling, they would have looked for a better way.\u00a0 Their surviving competitors are not dummies.<\/p>\n

Extra credit for the compensation mavens reading this if they can identify the irony in the title, which was actually coined nearly 20 years ago<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Finally, a sensible editorial on banking compensation.\u00a0 Alan Blinder waves away the misdirection associated with “how much” bankers have been paid to identify the critical element of “how” they’ve been paid.\u00a0 The answer, as my loyal readers know, is the infamous trader’s option and the trader’s supervisor’s option. Darwinian selection ensures us that these folks […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"class_list":["post-1361","post","type-post","status-publish","format-standard","hentry","category-executive-compensation"],"_links":{"self":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/1361","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/comments?post=1361"}],"version-history":[{"count":7,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/1361\/revisions"}],"predecessor-version":[{"id":1369,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/1361\/revisions\/1369"}],"wp:attachment":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/media?parent=1361"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/categories?post=1361"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/tags?post=1361"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}