An interesting article by a risk-averse quantitative financier:
the current system of compensation at financial companies does not lead to anything good at all. If you give $10 million to random people on the street and tell them that they’ll get 20 percent of any profit they make, without any consequences if they lose it, then many of them will go into the nearest casino and bet it all on red. (The really clever ones will find a way to leverage it up first — after all, a $2 million bonus is nothing; you can’t seriously expect people to live in New York or London on less than eight figures, can you?)
Many Lehman Brothers employees received some of their compensation in Lehman shares. They aren’t feeling too happy right now. But a system run on that principle could achieve exactly what is needed: a closer link between a person’s paycheck and the longer-term success of his trading. At the moment, a trader can sell a 10-year toxic contract, pocket a nice bonus after a few months based on some theoretical valuation, and then disappear to another bank or off into the sunset, leaving nine years in which that contract could blow up.