A defense of the total return to shareholders (TRS). Our authors use TRS as the bottom-line performance indicator, and come up with a number of performance insights.
Trends in Trader Compensation: No "Magic Bullet"
When it comes to pay levels, knowledge is power.
program for trading organizations that focus primarily on asset optimization is challenging, as many of the information and reporting systems ( i.e., book structure and transfer pricing) required to measure “value added” do not exist. Additionally, with complexity comes unintended consequences. For example, if a trader bonus pool is funded with a percentage of profit or value added, the “deal” appears to be equitable—the more the traders make for the company, the more they are paid.
However, it’s not that simple. The incremental costs and the amount of risk taken also must be considered. Otherwise, the company could be rewarding behavior that is inconsistent with the company’s strategic mandate. Additionally, a purely quantitative allocation of bonus pool dollars often overlooks important, subjective factors that also should be taken into account, including teamwork, infrastructure development and leadership abilities.
Not Easy, or Cheap
There is no perfect solution to determining trader compensation. Each company must define “the deal” for traders based on the company’s business strategy and the role the trading organization plays within that strategy. The cold fact is that retaining traders in a hot market is not going to be easy or cheap. But with effective leadership, a thorough understanding of the competitive marketplace, and a compelling total rewards package for commercial talent, it need not be so expensive or painful.