According to the CEO of Unicredit, if you think there was a moral hazard problem before with folks taking excessive risk to maximize short term profits and bonuses, just see what happens if you remove the carrot and just pay them everything as a fixed salary.With the global push towards bonus reduction in full force, Alessandro Profumo had some words of caution for those wanting to see guaranteed bonuses morph into guaranteed salaries.
“If you don’t have any link of your compensation to your long-term results, you are incentivized to take risk, by definition,” Profumo told journalists at a meeting in Istanbul.
“If you have only fixed compensation you don’t have any link between your compensations to the value of the company,” he said. “I can take all the risk I want and my compensation won’t change.”
Sounds like a perfect reason to implement performance-based compensation in DC.
That logic is a tortured as one of Greg’s sentences. If you have no upside, you have no incentive to take risk. Your downside is known (i.e. you get fired for taking risk and getting it wrong) while your upside doesn’t exist (i.e. take risk, get it right and earn nothing)
Or, as often happens in organizations with fixed salaries, you’ll see more complacency, more empire-building, more silo’d information, and all sorts of other dysfunctional behaviors you learn to avoid/fix in Management 101.
Glondor, squisha squisha?
Ask Christine Keeler what Profumo knows about risk management.
I think Greg is British. He makes me feel so ashamed of my roots.
-@4
Careful with that axe, Eugene
@ Analyst. So your saying my grand theory that the public sector should do everything is disproved in Management 101. I knew I shouldn’t have taken Philosophy as my elective! But then again I have a Nobel prize so what I say must be smarter than what you say.
P. Krugman
@ Krugman
Yes. Take your Nobel and shove it up your smug hairy cornhole.
“Sounds like a perfect reason to implement performance-based compensation in DC.”
one of your best yet Greg, but I’m sure you’ll have plenty of boring ones later today.
greg. this is like a 5th grade economics lesson. did anybody really need to see a post on this?
FUCK, bess, we need some consistent standards on what gets airplay here. my friends and i send you juicy stuff every day and then you let greg get away with this?
“my friends and i send you juicy stuff every day”
links to http://www.bloomberg.com don’t count sport
@11 FTW!
-not 11
@ 10 = fag
Am I alone in thinking that I am beginning to miss the slightly off-kilter and frequently unhinged rantings of Equity Private in these pages?
Admittedly, she has gone completely native at Zerohedge, but maybe we could bring her back for closely supervised guest posts. You know, sort of like supervised crazy.
Greg, the moral hazard wasn’t “folks taking excessive risk to maximize short term profits and bonuses”; it was bailing them out when everything they did turned to shit. Break up the mega-banks into entities small eough to fail, and let them.
@15 I think that from time to time. However, I think that that’s like letting a retarded Noel sister out of the hobbling-device to run around for a little because you feel sorry for her.
You immediately regret it after she takes a giant dump on the kitchen table.
Is it sad that I click Greg’s posts to read the comment abuse more than his content?
@15
That was very insightful. i’m sure no one has ever had that thought before. Tell me, what fixed compensation government worker who was too stupid to hack it in business gets to decide which banks get which assets?
Oops. @16 was meant for @14
@17- 100% agreed. Only after the first 5-10 comments do I (usually) go back and read the article for myself, to see what the fuss is about.
@ krugman:
BTW, Yasser Arafat and Jimmah Carter are also in possession of Nobel prizes. Like them, you suck.
@18
Bring back Glass-Steagall and divide assets along those lines.
-15
@15 absolutely fucking false, a terrible suggestion founded on no thought whatsoever and completely deserving of a good old-fashioned ad hominem rebuttal, you goddamned moron.
I see both sides of the equation having worked in a “bonus” environment, and in a vanilla salaried position…bonuses and incentives bring out both the best and the worst in people. Salary simply = do just enough not to get fired. The problem has always been how to protect against the renegade risk taking……If GS could just share maybe a 5 point plan with every corporation in the land, life would be grand.
Its easy to hate them, but man do they have the risk model fine tuned.
They also obviously have the best folks around….what did we expect would happen when a place like, oh, ML overhires 1000s of testoterone fueled, pussy chasing, beer slugging ex fraternity lax players, and lets them loose on the global economy……I mean for crying out loud, most of these dudes are out drinking heavy 7 nights a week, blowing lines and showing up in the morning glassy eyed ===== total clusterfuck
@23 = vickles
@22 FAIL. The assets that are getting crushed are all assets that would fall on the commercial bank side where Middle Class Joe keeps his deposits (the person I’m assuming you want to protect). Reinstating that would only take profit centers away from those banks. The type of assets being held by the banks isn’t the problem, its the quality of said assets.
@24 = JT
@27 = KL
@26
I don’t give a shit about Joe Six-pack, nor do I give a shit about bankers. If certain institutions are large enough to warrant emergency government intervention because they suck at risk management, said institutions need to reduce their size; I really don’t want to pay for their massive fuck-ups again. Keeping commercial banks, i-banks, and insurance companies separate would’ve prevented the mess we’re in now.
@29 If you believe Glass Steagall would have stopped trillions in bad assets from being created, you’re just ignorant. All of the processes that led to the current crisis could still have been done legally under Steagall, in a more roundabout fashion. The government would still have stepped in, it just would have been bailing out smaller banks. Taxpayers would still be on the hook for the same amount.
“All of the processes that led to the current crisis could still have been done legally under Steagall, in a more roundabout fashion.”
I don’t know that this is true (I don’t think you do either.), but even if it is, the “roundabout fashion” required to put all the processes in motion would have at least slowed the rate at which toxic assets were created. Furthermore, there must be some truth to the phrase “too big to fail,” since it’s been legitimized by both proponents and (theoretical) opponents of government intervention.
Banks made and securitized subprime mortgages under Glass Steagall. Underwriting standards declined as a result of easy money and government urgings to finance more consumer spending, as it forgot the lesson of the RTC and the late 80′s and early 90′s. The amount of bad assets is what precipitated TARP, not the size of the banks. “Too Big to Fail” would simply have been applied to a higher number of smaller banks, making the bailouts even more complex than they are now.
well its all carrots with these scum, is the main problem, if there some stick involved like for example everyone at Merrill Lynch above VP being strung up from a lampost the next time they blow up the world economy then we wouldnt have to worry about the problem would we?
I always thought that most people do a good job in their job because a – they want to do a good job, and b – to keep their job.
But, we are told that once you become the head of a large corporation, you will only do a good job if you a – get paid more than you are worth and, b – get a large year-end bonus regardless of the quality of your work.
And we wonder what happened to the American Dream!