Alan Johnson, managing director of pay consultancy Johnson Associates Inc., blames unrealistic performance targets for much of the risky behavior. He says executives of some financial firms he advised had to produce a return on equity of 20% to earn their full annual bonuses. A more realistic goal might have been around 15%, he says.Clearly, that's a recipe for disaster, because banking is about putting on assets that are often front loaded in fees, and often have average lives of 7 years. I would think a better compensation would be to give these guys options that mature in 5 to 10 years, or some function of net income, including extraordinary items, over such a period.
Giving a financial executive a bonus based on this year's ROE, seems like an incredibly dumb incentive, moral hazard of the first order. They did mention they are trying to make executives hold stock for 2 years after leaving the firm. A good first step.