Risk (Management) and Reward

"We're going to be taking a look at broader reforms so that executives are compensated for sound risk management and rewarded for growth measured over years, not just days or weeks."
--President Obama, 4 February 2009

In one line from a White House speech on the economic crisis and executive compensation, President Obama seems to have hit on something near and dear to the hearts of risk managers everywhere: being compensated for sound risk management.

As GlobalRiskjobs has been active in risk and compliance forums during the crisis, we know that the topic of how it happened / how do we stop it in the future is a constant. One of the more prevalent themes is how do risk managers get a bigger voice in profit-driven organizations run by those paid to push the envelope to make more money for the firm? Individuals are compensated for making money and risk managers have too often been viewed as advisors who are more of a drag on maxing out these earnings than contributing to the safety of those earnings.

So, have we reached an inflection point in the financial markets where someone will finally figure out - or even mandate - a way to compensate individuals for sound risk management? If we are not there yet, it would seem to be as good a time as any for risk managers to find a way to better align their compensation with the goals of the firm: protection of the ability to earn consistent returns ad limit capital destruction.

How do risk managers and compliance people raise their profiles in the organization? How do they measure their own performance within the performance of the organization as a whole? We would love to hear from you with ideas on how to do this.

A quick tour of the headlines:

• It's Employment Friday and the numbers are ugly. The 7.6% unemployment rate is the highest since 1992 and payrolls were down 598,000.
• A life insurance unit at The Hartford missed a capital target.
• Geithner looks to be favoring guarantees over the Bad Bank plan.
• Moody's is worried about the financial position of the U.S.
• Credit cards are showing signs of big strain.
• Felix Salmon of Portfolio weighs in on a broken model at hedge funds.

Have a great weekend.

Wall Street Compensation Under Fire

In the time since it was revealed that John Thain paid bonuses to legacy Merrill employees in the run up to the BofA merger, there has been a growing outcry about Wall Street compensation. It seems a day does not pass without a new story and a new angle on the bonus controversy. I know everyone is weary of the "Wall Street / Main Street" rhetoric that was so prevalent in the fall, but the heart of bonus season has added new fuel to the fire. No doubt spurred on by U.S. President Obama's "shameful" comment in reference to Merrill's conduct, it seems every media outlet has an opinion on the matter. Personally, I was pulled into the debate immediately upon arriving at a Super Bowl party on Sunday night. On one side, a guy who makes his living on Wall Street, on the other a tech entrepreneur doing everything he can to keep his small company moving forward in a sinking economy. At the center of the storm, how can a bank that takes government money to survive pay any bonuses at all? Let me be clear, the Wall Streeter is not a guy who has made outsize sums of money pushing now-toxic assets around the financial universe, but rather a hard-working guy with 3 kids who makes a decent living (by NY standards) in a more traditional product area. He is, however, employed by a financial institution that has taken billions in TARP funds to stay afloat. You can guess where this is going...The media loves to write about the hedgies and bankers who got paid millions and ruined the financial system, but there is another side to this as well. While many of the American Middle Class lives paycheck to paycheck to eke out a living, it may come as a surprise to hear that lots of Wall Streeters live bonus check to bonus check. A disruption to the comp cycle can be just as devastating for these folks. Yes, there are lots of people in the NYC suburbs, for instance, with 3 or 4 kids, living in one modest residence, with hefty property tax bills, paying nannies and babysitters to ease the dual working couple burden who, as shocking as it sounds to the rest of the world, cannot make ends meet on a $150,000 base salary. They rely on that "variable comp" component to get even or sock a few bucks away for college and retirement every year. But, the debate raging now is all about the question of what IS a bonus? Is it a little extra cash in years where everything goes right? Or is an entitlement that gets scaled based upon different performance metrics? How many of you who work on the street have heard the mantra, "it's a year end business" when asking for a bump to your base salary, perhaps? Is it "discretionary" compensation, as many bosses like to put it? Or is it "arbitrary" compensation, as many receivers of a bonus can tell you they feel there is no rhyme or reason to the number. I remember vividly being told by a super-cynical more senior banker early in my career that one's bonus is "a little bit about what you've done, a little bit about what we think you're going to do, and a LOT about what the job market away looks like". Well, I'm thinking he may have been right. It seems that this comp year at financial firms that generally did not make money last year and have dim prospects for this year, the defense of bonuses is that troops will simply walk across the street and find another employer if they don't get paid. The Main Street reaction is that this argument is pure B.S. and the hundreds of thousands of layoffs in the sector would seem to back that up. But as the latest news of a financial talent raid illustrates, the reality is that there will always be a bid for skilled people. That's what the banks fear. In past downturns, things have turned hard the other direction and banks did not want to be caught in the talent squeeze by having to dole out even more money by way of guarantees to attract people back to their firms when lots of others want to hire the same people. Will it play out the same way this time?

Let's take a quick tour of compensation news form the last few days.

• Catherine Rampell looks at a history of the holiday bonus
• NY Times has some, er, passionate letters to the editor today regarding the bonus debate.
• President Obama continued to pound the table about Wall Street bonuses.
• Rob Cox at Breakingviews says the bonus system should be reformed, not destroyed.
• Andrew Ross Sorkin ponders what a world where regulators receive bonuses would like.
• David Segal reports on a most unpopular group of professionals.
• News that Credit Suisse will cut bonuses 55%
• BofA looks like it knew more about Merrill bonuses than it initially let on.
• News that Deutsche Bank will cut bonuses by 60%.
• Deal Journal wonders if Thain might have been right about the Merrill bonuses.

And remember, wherever you stand on the bonus debate, you can always look to GlobalRiskJobs for Risk and Compliance career opportunities and compensation information.