And another thing… (on bonuses). One of the skews in the compensation schemes at large institutions with shared bonus “pools” is that those who do well when the firm as a whole does badly are paid poorly compared to those who do well when the whole firm also does well.
Why does this matter? Because it encourages group behaviour. If your institution lost big being long dotcom stocks in 2000, whilst personally you had a great year being short, you would have had the satisfaction of being right whilst all around you were wrong, but not the satisfaction of spending a big bonus cheque.
So what would you have done? Resign to set up your own hedge fund, or stay loyal and make a mental note that next time you see a bandwagon rolling you’ll jump on board? And we’re surprised at herd behaviour!
Related reading:
London fights for its future FT
Beyond the financial crisis FT
Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.
