Is Compensation a Villain Of the Credit Crisis is the title of a recent post on the US Banker website.

“While compensation was not THE cause of the current credit crises it certainly can be viewed as a significant contributor.”

The idea is that today, bank’s incentive compensation plans are mostly based on the current year’s revenues.  However, most trading profits are from revenue streams spanning multiple years.

The authors recommendation is to audit incentive plans to identify and remove features that incent short-term behavior.  He also makes several other recommendations including:

1. Executives should have significant personal capital at risk


2. Current cash and long-term reinvestment in the firm should match the firms’ lines of businesses generating its profit


3. Take back incentives if deals do not go through (only incent when actual profit is made)


4. Ensure executives understand and take risk ownership


5. Measure performance for the entire firm


6. Develop talent from within and build a long-term culture.

Not bad ideas, but I’m sure financial institutions have many very