An interesting piece in the Harvard Business Review about the problems present in the current financial sector and the incentive system created by a financial-market based compensation system.
Read the whole thing, it’s quite interesting.
Nob Akimoto
Nob Akimoto is a policy analyst and part-time dungeon master. When not talking endlessly about matters of public policy, he is a dungeon master on the NWN World of Avlis
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I wish I had more time to follow the various threads that lead into and out of this article. A few subtopics of this article have also emerged in the subtopics from recent podcasts of Russ Roberts’ Econtalk. And, I assume they’re popping up elsewhere.
This paragraph synches the article well with Roberts’ talks with Eugene Fama(1/30/12) and William Black(2/6/12):
“The point here is more specific: Financial markets cannot be relied upon in simple ways to evaluate and compensate individuals because they can’t easily disentangle skill from luck. Widespread outsourcing of those functions to markets has skewed incentives and provided huge windfalls for individuals who now consider themselves entitled to such rewards. Until the financial-incentive bubble is popped, we can expect misallocations of financial, real, and human capital to continue. The misplaced incentives are simply too powerful. “Report
That doesn’t sound like Russ Roberts (he’s a reliable shill for the wealthy). Must have been the guest.Report
Finally, and most important, the largest capital providers should, as some have begun to, renegotiate incentive fees toward a significantly longer term with better performance and risk assessment. Alpha is neither easily captured nor easily measured, and investment practices should reflect that basic reality.
Nut.Report
Could you elaborate?Report
Jeebus, where to start? You may recall me beating my little spoon on the bottom of my saucepot about how Mitt Romney’s stint at Bain Capital represented the standard issue MBA schtick of the day, Milton Friedman’s preachments on the primacy of the stockholder.
Romney’s not a villain in this story: everyone was doing it, Romney did it as well as anyone, maybe even better. He’s focused on short term gains based on hard-nosed negotiation.
If we need a villain, the inept and seldom-qualified boards of directors would serve nicely. Support the turn toward restricted stock and vesting based on longer-term accounting metrics
The best long-term strategy for any firm ought to be the creation of capital. Basic accounting: price/earnings ratio determines viability only to a certain point: above an arbitrary price/earnings ratio the stock has become speculative: at a happy medium, the stock will move in concert with actual profit and loss data. Below that point, it’s back to the Capital end of the financial statements. A solid company exhibits solid earnings.
That might be simplistic….Report