Guest comment: Say goodbye to banking bonuses?

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There's consensus growing in and around both Wall Street and the Square Mile that the compensation paid to bankers and traders needs to be revamped. Pay not only should be reduced, the thinking goes, but there also is a need for a mechanism by which bankers and traders can be held accountable for their actions in any given year.

But when I attended an event sponsored by the CFA Society of the UK and the CFA Institute at the London Stock Exchange last month, there seemed to be little consensus about how to change the current system. Wall Street executives seem equally stymied. Even at the March hearing on banker pay, held before Congressman Henry Waxman's Committee on Oversight, there was no discussion of reform. And there certainly has been no mention of it since.

How might a revamped compensation system work?

As things stand, senior bankers and traders are paid millions of dollars annually, regardless of whether the deals they advise on or trades they consummate work out well for client or firm, or neither. It's heads we win, tails you lose. By the time the inevitable disaster strikes, bonuses are whisked out of the firm into personal bank accounts.

Wall Street needs a revamped system that holds bankers and traders accountable for their actions. Why not create firm-wide escrow accounts and force anyone who makes $500k or more annually to contribute half of their compensation beyond $500k to the fund?

The money accumulated can be used on an annual basis to absorb any legal judgments, losses or fines related to the business lines of the contributors. After three years, assuming the banker or trader is still at the firm, the remainder of the escrow plus accumulated interest can be dispersed, based on the initial contribution.

What if you've left the firm in the interim? Well, that's just too bad - you lose the money contributed. The escrow will serve the dual purpose of keeping behaviours in check and placing golden handcuffs on those who want to leave.

Of course, the chance of Wall Street CEOs voluntarily adopting this reform is close to nil. And that is where the regulators come in. They must seize this moment to impose badly needed compensation reform on Wall Street and the City.

So in addition to worrying whether you will get fired or whether you can ever find a job on Wall Street in the future, you can add the worry about whether you will ever again be paid like bankers and traders were in the good old days of 2007.

William D. Cohan, author of The Last Tycoons: The Secret History of Lazard Frères & Co. (Doubleday 2007, published in paperback in the UK by Penguin April 2008), was an M&A banker on Wall Street for 17 years.

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