With the wild swings in financial markets the past few months, one has got to question how much of the market really is in it for the long term. The public is universally told by almost any investment advisor to avoid at all costs selling in a downturn as it a sure fire way to capital destruction. Great advice! As picking the market is almost impossible.
However, it seems to be some of the players in the market who are in effect really only playing with our money as our proxy in many cases should take heed to some of their own advice they give to everyone else. As the current decline in stock prices, no, it not a sell down as some will let you believe. It a decline in prices as for everyone that is selling, there someone else buying what would seem compared to historical prices to be an absolute bargain.
While some of the market issues at the moment are genuine rebalancing of the various factors and getting them back in sync, for example, housing prices in the United States were well overvalued and the same could apply to some markets elsewhere. Also the sub-prime debt issues were also something that was a ticking time bomb waiting to happen but some of the other issues demonstrate the weakness of some market players to short term incentives.
However, for most players in the market there isn’t any incentive for long term performance as all the bonuses are short term. Making the irrational pessimism in financial markets, the perfect answer to irrational exuberance that has lead to the previous run up in share markets. As at the top of the boom, there is very unlikely going to be any room to move at the same pace upwards as the possibility for growth slows. There is also the incentive to short sell stocks to gain bonus on the way down.
You have to wonder why stock market declines are so short and sharp in comparison to stock market rises as cynical mind would say that financial institutions are happy to take one big hit to open up some buying opportunities for the next episode of irrational exuberance. You may forgo one bonus for four bigger ones later on as you can buy the stock at a much lower price!
Bonus need to be reworked to overcome the issues with human motivation. It plan fact that when bonus are involved those earning the bonus have a lot of control of how they can ensure they met the targets to their advantage. And why not, that is where the reward are, the same applies in any industry.
Sales staff will hold back that extra sale to the next month, if they have met their target or will look for quick gains to boost their commission if they are planning on leaving soon. None of which build sustaining relationships or customers, the same applies to the investment industry.
A solution is very difficult, for example if you created longer term incentives this would mean less money upfront and longer term bonus spread out of the years depending on the funds performance. However, how do you break up who done what? That another long story even before you get to the issues that arise when paying employees that have left the company, finding money to pay out in a downturn is much harder and like any system nothing is perfect, their will be a method to overcome it just like the current system.
Or to be radical basis it on skill or ability as opposed to the financial measures which can be manipulated and replace it with subjective measurement. The other is not to pay any bonus at all and have a higher base but you still run into the reality of less money is around when times are tough plus some employees may seek out better wages with the bonuses on offer elsewhere during the good times.
However, when it comes to work money isn’t everything but it a much easier solution that being bold in a competitive marketplace for talent. The current system while is imperfect, we are stuck with it because it fits the circumstances and the other alternatives have different imperfections we would equally despise!