Wednesday, November 12, 2014

The Bonus Conundrum

Bloomberg reported:

American Realty Capital disclosed last week that accounting errors were intentionally concealed at the New York-based company, leading to the resignation of two executives and sparking an FBI investigation and a review by the Securities and Exchange Commission. 

The Wall Street Journal reported today that the errors were tied to bonuses. The mistakes resulted from incorrect accruals relating to bonus payments made to management and other employees, according to a person the newspaper didn’t name. 

Bonuses caused management to lie, cheat or steal to garner the prize, which leads us to our next story where financial traders did just that in rigging foreign exchange and gold.  Their punishment?  200% bonuses!  Zero Hedge reported:

FINMA has also instructed UBS to limit bonuses for traders of foreign exchange and precious metals to 200 percent of their base salary for two years.

Which means that clearly nobody is going to jail, however the punishment is far more harsh: riggers will have a bonus of ONLY 200% their base salary for two years to look forward to!  The horror, the horror.
If management wants to distort something, do the following:

1.  Construct a complex extrinsic reward system
2.  Give it time. 
3.  Kaboom!

That's what will eventually happen with the greed and leverage boys.  Party like it's 1929!

Update 5-17-22:  German Allianz SE agreed to pay $6 billion and plead guilty to securities fraud for its Structured Alpha funds.  Reuters story stated "managers also inflated fund results to boost their pay through performance fees."