Back when the financial crisis hit, bank bonuses were often criticized. Some lawmakers argued Wall Street's compensation culture resulted in bankers and traders taking bigger long-term risks that didn't manifest themselves until after they were paid big bonuses based on short-term profit. But reform is proving difficult and might not even be effective.
You might recall that the massive Dodd-Frank financial regulation bill actually had very little to say about bonuses. Instead, the Federal Reserve intends to set some new guidelines, which will result in longer-term compensation plans that allow banks to claw back bonuses if losses are incurred years after bonuses are awarded. But an article from Bloomberg today reports that global banks have been slow to institute such new compensation structures. What's the problem?
Obviously, bankers and traders aren't crazy about new ways to defer their pay -- and they're the ones with the leverage. If one bank tells a key trader that her bonuses will be deferred for five years going forward, she won't be pleased. She'll probably start shopping around for a new job; after all, she can trade from anywhere. If all the other banks are acting in unison, then that's fine -- she'll just start a hedge fund.