David Ignatius: Financial Incentives

Posted by admin on Sunday, September 26, 2021

David Ignatius Money Quote saying If bankers compensation was more closely tied to long-term performance, it would be like hedge fund managers pay. David Ignatius said:
 
If you want better behavior from bankers, their financial incentives like those in the hedge-fund world – where managers net worth is tied to their long-term performance Quote
 

“If you want better behavior from bankers, then make their financial incentives more like those in the hedge-fund world – where managers have ‘skin in the game,’ and their net worth is tied to their long-term performance” — David Ignatius

 

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In this quote, David Ignatius seems to be proposing that changing bankers’ compensation structures could help reduce risky or unethical behavior that damages the financial system and economy. Specifically:

  • Ignatius notes that hedge fund managers have “skin in the game” since a significant part of their own net worth is directly tied to the long-term success or failure of the funds they oversee.
  • In contrast, he implies that for many bankers, their personal financial fortunes are not as closely linked to the long-term health and sustainability of the banks they lead.
  • Ignatius appears to believe that designing banker pay to more closely mirror the “hedge-fund world” model, where executives have more on the line based on long-term performance, could incentivize conduct that considers broader impacts and is less focused on short-term gains.

The best interpretation is that Ignatius is arguing bankers would likely make wiser decisions and take fewer risks if compensation involved more deferred payouts contingent on sustained positive outcomes, since it would give them literal “skin in the game” and make their fortunes directly reliant on responsible stewardship of the financial institutions they oversee according to his perspective on reforming incentives to discourage conduct that endangers systemic stability.

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