Fat cat bonuses; lessons could learn from Wood Mackenzie

Fat cat bonuses in the City dealing rooms have become the topic of discussion this week with all and sundry it seems having a view. The Archbishop of York is just one of the stranger people taking a shot at the City but he was then joined by the Prime Minister. It looks like open season on fat cats and who could argue it is not deserved. However, sometimes "fact can be stranger than fiction" and with these diverse individuals both commenting on compensation, it shows that this topic draws together individuals and offices that are so wholly unrelated.

There is clearly an issue, although we must fall back from assigning all the responsibility for the current financial crisis at the doors of overly aggressive and greedy traders. It was really good timing by the Securities and Investment Institute to organise their annual lecture on "How far does the industries compensation culture threaten its future? How to fix it"

The two speakers were Tony Jackson, Financial Times Commentator and Jeremy Anderson, Head of Financial Services EMEA KPMG.

Despite valiant efforts from both to present their particular position and possible solution it was unclear how different they were. Its probably to close a call to build much of a debate, as just about everyone appreciates that remuneration has rocketed too far away from reality and it's a different world from those the presenters grew up in or for that matter the majority of the mainly grey haired (or no hair) audience.

One point that appeared to be lost in both presentations was the payment of bonuses against unrealised profits. We now know that many of the dealing strategies through complex instruments were based on falling values of collateral. Sooner or later the penny drops and when repayment is called the asset has lost value. Paying bonuses against these strategies before they materialised is a major fault in the compensation process.

Tony Jackson had his formative years in his career at Wood Mackenzie, a highly successful Scottish Broker and run as a partnership and made the important point that partners had a mutual protective interest. No paper profits in those days would be paid away as high bonuses bringing risk to the firm.

We obviously can not go back to those days but we do need to heed the important lessons of how to run a business in a financial market built on risk taking.

A similar environment of compensation as was conducted in the past would go a long way to recreating an industry where success is rightfully rewarded and encouraged but where financial services operate within their means.