Comments on: The Question of Compensation http://greatbong.net/2009/03/02/the-question-of-compensation/ Tue, 07 Feb 2012 19:38:22 +0000 hourly 1 http://wordpress.org/?v=3.1 By: trib http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-876450 trib Tue, 14 Dec 2010 07:43:57 +0000 http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-876450 My two cents to this well written article. I think one of the primary reason which abets manipulation in Trading is the accounting method used to calculate PnL. Regulators allow MTM(mark to market) accounting which accounts unrealized PnL in total PnL- which is root of all the problems. If we use plane Cash accounting to measure traders’ profit his numbers would not look so nice. Simple example will demonstrate this: Suppose, you buy a house for $10000 and rent it out for a year. At the end of the year the value of the house is $12000 and you rake in $1200 on rents. Your PnL will be: Under Cash Accounting -> PnL = $1200 Under MTM accounting ->PnL = $ 1200 + [12000-10000](unrealized part)=$2200. MTM accounting pushes up your PnL. So, by using Cash accounting, the compensation can be made unglamorous. Other point is the valuation (or MTM of your asset) basically prices your risk (which can be manipulated by VaR like measures). The risk measured by VaR is reduced if asset classes are correlated. One way of being more conservative in your risk measurement is to assume that all assets are not correlated, then the risk measured by VaR will bump up( In reality all assets are correlated, hence they all go bad at the same time (black swan event) ). By assuming them to be uncorrelated the variance of all assets will overestimate the risk (it still not the prudent number) – which is more conservative. My two cents to this well written article. I think one of the primary reason which abets manipulation in Trading is the accounting method used to calculate PnL. Regulators allow MTM(mark to market) accounting which accounts unrealized PnL in total PnL- which is root of all the problems. If we use plane Cash accounting to measure traders’ profit his numbers would not look so nice. Simple example will demonstrate this: Suppose, you buy a house for $10000 and rent it out for a year. At the end of the year the value of the house is $12000 and you rake in $1200 on rents. Your PnL will be:
Under Cash Accounting -> PnL = $1200
Under MTM accounting ->PnL = $ 1200 + [12000-10000](unrealized part)=$2200.
MTM accounting pushes up your PnL.
So, by using Cash accounting, the compensation can be made unglamorous.
Other point is the valuation (or MTM of your asset) basically prices your risk (which can be manipulated by VaR like measures). The risk measured by VaR is reduced if asset classes are correlated. One way of being more conservative in your risk measurement is to assume that all assets are not correlated, then the risk measured by VaR will bump up( In reality all assets are correlated, hence they all go bad at the same time (black swan event) ). By assuming them to be uncorrelated the variance of all assets will overestimate the risk (it still not the prudent number) – which is more conservative.

]]> By: Rajandran R http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-853759 Rajandran R Tue, 31 Aug 2010 16:45:11 +0000 http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-853759 GB its simply a great post keep it up! GB its simply a great post keep it up!

]]> By: Shah http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-693748 Shah Tue, 17 Mar 2009 22:26:48 +0000 http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-693748 @Sanket Comparing Financial investments/ Banker's performances to gambling is at best ridiculous. You don't have any control of the variables at play in many forms of gambling and even in forms, where you could control, the scope is abysmally limited and your performance impacts only you. But when comes to banking and finance or any job for that fact, there are so many variables you control and a responsible person should know the impact of his acts/work. @Sanket

Comparing Financial investments/ Banker’s performances to gambling is at best ridiculous. You don’t have any control of the variables at play in many forms of gambling and even in forms, where you could control, the scope is abysmally limited and your performance impacts only you. But when comes to banking and finance or any job for that fact, there are so many variables you control and a responsible person should know the impact of his acts/work.

]]> By: Sanket http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-692797 Sanket Sat, 14 Mar 2009 01:53:37 +0000 http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-692797 Suppose you go AC or Las Vegas and play for 100$ and win 50$ in the first hour. Then you play the next hour and loose 80$, are you expected to return the 50$ in the initial winnings for lack of long term performance? Investors are expected to understand this risk and take their decision accordingly. Agreed that the housing bubble had to go bust and top executives like Banker Patel did not realise this what even a 5th grader would have. But Banker Patel & Co reputation and good-will is so bad that even a local convenience store would not employ them. Tax payer have to suffer as governments we forget ideologies when we are not doing good.Finally, would also add that individuals always claim credit for good times (No one said thank you Banker Patel in boom times) but want to blame someone else for their misfortune. Suppose you go AC or Las Vegas and play for 100$ and win 50$ in the first hour. Then you play the next hour and loose 80$, are you expected to return the 50$ in the initial winnings for lack of long term performance?
Investors are expected to understand this risk and take their decision accordingly. Agreed that the housing bubble had to go bust and top executives like Banker Patel did not realise this what even a 5th grader would have. But Banker Patel & Co reputation and good-will is so bad that even a local convenience store would not employ them.
Tax payer have to suffer as governments we forget ideologies when we are not doing good.Finally, would also add that individuals always claim credit for good times (No one said thank you Banker Patel in boom times) but want to blame someone else for their misfortune.

]]> By: Dibyo http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-691978 Dibyo Mon, 09 Mar 2009 15:24:36 +0000 http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-691978 Anonymous, Again net tax paid. Anyway, let's agree to disagree. I am not too thrilled about the manner of the bailout either, but it is not as unfair as it is made out to be by the anti-bailout people. Anonymous,
Again net tax paid. Anyway, let’s agree to disagree. I am not too thrilled about the manner of the bailout either, but it is not as unfair as it is made out to be by the anti-bailout people.

]]> By: yourfan2 http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-691666 yourfan2 Sun, 08 Mar 2009 07:42:04 +0000 http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-691666 Nice cartoon overview of the credit crisis: http://vimeo.com/3261363 Nice cartoon overview of the credit crisis:

http://vimeo.com/3261363

]]> By: Anonymous http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-691371 Anonymous Fri, 06 Mar 2009 18:35:22 +0000 http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-691371 Your belief does not change the fact of the US tax structure. Your analysis of the spending habits and their impact on the economy is also rather naive. Raghu may eat at Morimoto but the effect of 3 Raghus eating at Morimoto is swamped out by the effect of 1000s of Rams eating at Domino in terms of money flow. Your belief does not change the fact of the US tax structure. Your analysis of the spending habits and their impact on the economy is also rather naive. Raghu may eat at Morimoto but the effect of 3 Raghus eating at Morimoto is swamped out by the effect of 1000s of Rams eating at Domino in terms of money flow.

]]> By: Dibyo http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-691355 Dibyo Fri, 06 Mar 2009 17:21:04 +0000 http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-691355 Anonymous, I kinda disagree with your Ram/Raghu example. I believe that taxation on bankers bonuses are close to the 40-50 % region. So if Ram earns 15 paise, he is taxed (after returns) 4 paisa. Raghu earns 1000 paisa and is taxed 450 paisa. Now if they pay this for five years - Ram's net tax = 20 paisa Raghu's net tax = 2250 paisa Now Raghu gets back 1500 paisa in bailout. We are ofcorse discounting the fact that Raghu eats at Morimoto, shops at Louis Vuitton and drinks MaCallan 18yrs. (All heavily taxed) Ram eats at Dominos, shops at BJs and drinks Miller Lite. Anonymous,
I kinda disagree with your Ram/Raghu example. I believe that taxation on bankers bonuses are close to the 40-50 % region.

So if Ram earns 15 paise, he is taxed (after returns) 4 paisa.

Raghu earns 1000 paisa and is taxed 450 paisa. Now if they pay this for five years -

Ram’s net tax = 20 paisa
Raghu’s net tax = 2250 paisa

Now Raghu gets back 1500 paisa in bailout.

We are ofcorse discounting the fact that Raghu eats at Morimoto, shops at Louis Vuitton and drinks MaCallan 18yrs. (All heavily taxed)

Ram eats at Dominos, shops at BJs and drinks Miller Lite.

]]> By: Anonymous http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-691105 Anonymous Thu, 05 Mar 2009 21:13:36 +0000 http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-691105 And oh by the way who told you that software engineers are being bailed out? The government is paying taxpayers money so that bankers can get their 300,000 bonuses. I do not think that software engineers will benefit from the largesse in any direct manner. And oh by the way who told you that software engineers are being bailed out? The government is paying taxpayers money so that bankers can get their 300,000 bonuses. I do not think that software engineers will benefit from the largesse in any direct manner.

]]> By: Anonymous http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-691103 Anonymous Thu, 05 Mar 2009 21:10:51 +0000 http://greatbong.net/2009/03/02/the-question-of-compensation/#comment-691103 Correction: So Ram who should pay tax at a higher rate than Raghu actually pays no tax. should be So Raghu who should pay tax at a higher rate than Ram actually pays no tax. Correction:

So Ram who should pay tax at a higher rate than Raghu actually pays no tax.

should be

So Raghu who should pay tax at a higher rate than Ram actually pays no tax.

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