On Wall Street Compensation

Information Arbitrage does a good job here, suggesting that the hedge fund "2&20" type model be adopted by i-bank trading desks, and further encouraging traders to commit their own capital to their available $ with which to trade.  This sounds good on paper insofar as it would help align incentive structures for long(er)-term sustainable profits, however, it has several downfalls which immediate come to mind.

First, as I commented on the IA story, how big of a problem is this?  That is, over the past say 20, 30, or however many years, how often do we read about a rogue trader (or group thereof) inflicting irreprable harm on their firm or the "market" in general?  I don't know the answer to this, and I've yet to find anyone who could present any data besides a collection of anectdotes, like this from wikipedia.

Second, I'm immediately skeptical that anyone on The Street wants to be the guy(s) to shake things up as IA and several others have suggested.  Sure, traders hate getting comp in (restricted) company stock, but they also like having a safety-net.  I'm not sure what the distribution would be if you asked them which they prefer: 1. current arrangement, or 2. HF-like compensation with capital accounts, but I'd venture to guess depending on the market, product, age, and firm, the responses would be pretty mixed.  Of course then we have to worrry about regulatory/government reaction to any wide-spread changes in compensation.  While I think there's broad consensus among those groups that "something needs to be done," I don't think there's any more specific concensus than that. Then there's compensation cop Feinberg and his merry men in Congress (etc) who blow a gasket when news comes-out of a TARP-baby employee making more than "should be allowed" (whatever the hell that means). 

All things considered, I doubt we'll see any significant, universally-adopted changes in compensation in the near future, at least not until some of the ire aimed in our general direction gets aimed elsewhere.

Comments

[Anonymous]

This sight and it's contributors are super and I don't want to offend anyone but as a small business owner let me offer my "street level" view of compensation for someone that I trust with my money as a passive investment.
You wanna be a player? You want the big payoff on a good roll? Then you get ready to take some losses when snake eyes comes up. Try taking on some substantial risk yourself if you want credibility.
As an SBO unpleasant realities are part of my daily diet and if you want to manage my money you better have a strong stomach yourself.

[Anal_yst]

While I certainly understand your perspective, and don't particularly agree with the status-quo per se, you're comparing apples to oranges.  Wall Street is home to ridiculous supply/demand dynamics just like some professional sports, think like in baseball where a .250 hitter can somehow turn around and negotiate a $10mm/year contract just by switching teams. 

That's obviously an imperfect analogy, but (I hope) the underlying point comes through: money is always seeking return, and those who can deliver it.  BIG. (even if it means taking-on some "risk," but that's another conversation for another time).

Thanks for the comment and your perspective, hope you'll keep reading and commenting!