GUEST COMMENT: Let the market decide the appropriate level for bonuses

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The phenomenon of world leaders debating investment banking bonuses is nothing new. During the last G20 meeting in London, it was agreed that each G20 country should develop a code of practice specifying how financial services compensation in their territory should be regulated by the end of the year. In the intervening months, the FSA has developed a code of practice for compensation, as have a small number of others, including draft codes from the Swiss regulator and the Australian regulator.

However, before the FSA's code has even been implemented or organizations have been reviewed to see whether they are in line with its recommendations, the bonus issue has been revisited by politicians.

Financial services firms need to pay for performance. This means paying the right amount for the right return and aligning compensation with the risk taken to generate that return. Looking at how bonuses are determined and structured and enforcing the regulations will maximise the chances of achieving this. Capping bonuses is not the answer.

The ultimate arbiters of compensation policies are shareholders. It's worth remembering that before the financial crisis struck, compensation costs were fairly static from year to year (at about 50% of revenues for the large organisations). There was no need to impose a cap - the market decided the correct compensation ratio.

In advance of the next G20 meeting, it would be nice if a few more regulators came up with concrete proposals on how to structure bonuses. We may then be able to have a rational debate, instead of one driven by political noise and talk of bonus caps.

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