The Economist argues for a few changes to resolve the Wall Street Bonus imbroglio
The first is that the trigger for incentives (as well as the payments themselves) need to be longer-term in nature. Bonuses could still be paid annually but based on the average performance over several years; if bankers are rewarded for increasing the size of the loan book, their pay-off should be delayed until the borrower has established a sound payment record. The effect would be to claw back profits earned by excessive risk-taking.
The second is that the banks’ capital has to be properly allocated. If traders are given licence to use leverage to buy into rising asset markets, then the trading division should be charged a cost of capital high enough to reflect the risks involved.
