PAYING workers with shares in their employer is a time-tested way to ensure hired hands have the same interests as the firm’s owners. But the trick does not work so well with banks: bosses paid in stock have an incentive to expand a bank’s balance-sheet but not its loss-absorbing equity, increasing the likelihood of a bail-out as well as a bump in the share price. So regulators are speaking highly of a new sort of instrument to align incentives better: “performance bonds”. These are designed to make bankers cautious: they would not pay out for as long as ten years, during which time their value would not increase, but might fall if the bank founders.The idea, promoted by Bill Dudley, the head of the New York branch of the Federal Reserve, is roughly equivalent to demanding that senior bankers deposit their annual bonuses in the bank’s vaults for ten years. The delay is to make sure that the deals struck by the employees concerned do not eventually sour; if they do, the money would be used to help absorb the associated losses.Regulators think such bonds can be used to nudge financiers away from dodgy dealings, too. Fines meted out to banks for misbehaviour—of which there have been plenty in recent years—are in effect charged to shareholders. Deducting them instead from the pot of bankers’ future pay would punish those responsible instead.Mark Carney, governor of the Bank of...
from The Economist: Finance and economics http://ift.tt/1yfCEqz
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