The best proposal yet for aligning Wall Street pay with performance

There’s been lots of talk lately about fixing Wall Street pay so people don’t get rewarded so lavishly for taking crazy risks that blow up later. And there have been some pretty convincing explanations of why that will never work.

But now, in a comment to this very blog, Curious Capitalist regular and Wall Street veteran That Anonymous Dude offers what I think is the best Wall Street pay plan (well, really it’s a firing plan, but same difference) yet. Here it is (with a tiny bit of cleanup because he was typing fast), the TAD Regulatory Plan:

Eliminate (permanently) the bottom 5% of all wall street performers each year. If these guys can’t get with the trend and at least perform to avg level, these are the guys who are going to be suckered into buying stuff they don’t understand and are going to get blown up sometime in the future (hello orange county, ca). Wow, who knew tulip bulb/tech stock/derivatives prices could go down as well as up?

Also, each year eliminate the top 5% of all wall street performers. Statistically, you’ll probably be getting rid of them next year anyway. If they are having a multi-year run they’re probably doing something quite clever that will turn out not to be in a few years. Again, why wait til tomorrow to do what you can today? OMG, that event I thought was only .0000000000000001% likely, happened 3 days in a row.

After about 5 years of this, eliminate anyone left. Honestly, anyone who doesn’t understand the risk/reward ratio under the TAD regime shouldn’t be managing money anyway. Also, by permanently eliminating people, we get rid of the serial exploders (hello Mr. Meriwether) who hop from place to place.

I’ve got to say that I don’t fully understand the third paragraph. (If you eliminate anyone who is left, then who is left?) But the idea of eliminating the top 5% of performers every year is genius.

Apple CEO Cook Gives Up $75M in Stock Dividends

NEW YORK — Apple CEO Tim Cook is giving up $75 million in dividends on restricted stock that the company is awarding to all of its employees.

In a filing with the Securities and Exchange Commission on Thursday, Apple Inc. said that Cook requested that his restricted stock units not receive dividends. The dividends that Apple workers are getting amount to $2.65 per quarter for each restricted stock unit held. The shares are not normally eligible to receive dividends, so Apple’s decision is a perk for its employees.

The Epicurean Dealmaker

TAD’s just messin’ with you, Justin.

This is a very common personnel management strategy on Wall Street, called Asymptotic Mean Reversion Trader Culling. By the time you get to the last round of cuts–which do indeed eliminate the last vestiges of your workforce–your entire workforce is clustered tightly around the iron mean of mediocrity.

Since your firm has no-one left of any talent, you just wrap the whole thing up and send any remaining funds back to the Fed. Simple, neat, and understandable by any top executive on Wall Street.

M&A bankers, on the other hand, require an entirely different treatment …
That Anonymous Dude

the point is everyone then goes to nice index funds

m&a bankers – yes they definitely need some special treatment..
jayackroyd

On one of the Sunday shows, George Will proposed that the deal should be that if an investment bank goes to the discount window, the maximum salary at the firm should reset to that of a GS15, $124,000, IIRC.