"What boosts a firm’s stock price, and the boss’s standing, is a rapid expansion in revenues and market share. Privately, he may harbor reservations about a particular business line, such as subprime securitization."
The problem is misaligned incentives. Cash bonuses paid out long before the consequences of decisions become clear create problems.
Financial institutions can partly remedy this by replacing annual bonuses with long-term reward schemes like that adopted by Credit Suisse in 2005. If a decision proves to have been reckless/short-sighted a few years on, bonuses can be retracted.
If a decision proves to have been reckless/short-sighted a few years on, bonuses can be retracted.
Retracting something already given can be difficult, especially if the employee has moved on to another place. There are ways, of course, with "clawback clauses" and similar things, but that seems unnecessarily clunky if I understand them correctly.
Basing bonuses on long term performance after it has had long enough to play out and (at least most of) the consequences known may very well be a good idea though.
That's an appealing theory, but the only evidence produced to date that compares the performance of folks who got long-term compensation with those who got short-term shows that the firms that used short-term compensation did better than the ones that used long-term compensation.
The problem is misaligned incentives. Cash bonuses paid out long before the consequences of decisions become clear create problems.
Financial institutions can partly remedy this by replacing annual bonuses with long-term reward schemes like that adopted by Credit Suisse in 2005. If a decision proves to have been reckless/short-sighted a few years on, bonuses can be retracted.