I do appreciate the CISI does not leave the bonus debate to the public anger. Because the anger is always counter-productive and often misguided:

  • I'm afraid very few French commentators being sarcastic about ex-traders starting more society-conscious jobs are themselves great about the society around them. Not working at understanding situations is not a sign of great conscience or ethics. I don't think blaming traders for "losing" 20% of the value of a life-insurance portfolio is a sign of great conscience: I strongly suspect the buyer of the service would have achieved much worse, in a market crashing more than 20%, so (sorry but, yes,) the asset manager did probably bring value to his investments. I also strongly suspect the buyer of the service would have sold his portfolio at the top of the market if he had foreseen the crisis, so he would not have been any more a "responsible" "long-term" investor than his asset manager;
  • Most people want to spend a lot, save little, minimally contribute to pensions, but nonetheless want their savings to perform at ludicrous return yields (so they can retire early and keep the high-spending lifestyle!). They then refuse considering they're the ones requesting traders and asset managers to squeeze the workers of public companies into high-pressured low-salaries jobs under threats of globalisation and costs-cutting. It was interesting to see a French comment explaining that paying bonuses allows financial institutions to forget about ethics (or, more precisely, to push back ethical responsibilities on the highly paid individuals). This was an excellent point, but it forgets that institutions do not exist really outside of human investors and clients. Investors and clients all ask ridiculous returns (which require ridiculous risks (stop dreaming of a risk-free martingale!)) but blame scapegoat "traders" if things turn bad. Most commentators conveniently forget their own greed (e.g. in relation to their, unrealistically thin, pension savings) and denial-through-fees of ethical responsibilities. I don't hear a lot the commentators on the fact they're paid hundreds times more than some Chinese or Indian fellow human beings making their shoes and clothes but the same writers are outraged that some banking managers make hundreds times more than they do; that's jealousy, not a call for justice!

Back to CISI principles on bonuses. While I clearly agree to such principles, they unfortunately do not cover stupid excesses so they're only minimum requirements. Maybe a maximum ratio between the highest and the lowest paid individual of a company should be mandatory? Even a fantastic CEO needs clean toilets to conceive great strategies (and not to lose time planning how to reach cleaner toilets in a public place nearby). Or maybe a maximum ratio between bonus and basic salary? Or maybe, as proposed by another commentator, treating bonuses (beyond a socially-acceptable threshold) as "gifts" from the shareholders to the employees? This would attract specific tax treatments, would avoid linking social benefits to socially-unacceptable "salaries," would require explicit action from shareholders... Allow bonus up to e.g. 100% of basic salary... then pay dividends and attach a form so that shareholders can give a gratuity to the workers (like in restaurants...). Finally ensure rules so that not all gratuities end in the hand of top managers doing zero thinking on strategy and devoting all their time to internal politics, personal investments and golf to maximize their next cashflow (oh, sorry, did you still believe it ended in traders' hands?).

To finish, I'm afraid the flawed dominant line of thought has been followed by the CISI, in its principle 8: (...) the higher the bonus award, the greater the proportion which should be paid in shares. This ensures that the objectives of the individual are aligned with the shareholders and encourages a long-term approach. While I consider that employees' interests should align with shareholders' interests (and on such basis may agree that bonuses could be paid in shares and retained for some time), I'm afraid I remain to be convinced that shareholders take a long-term approach. As many people suddenly feel experts in asset bubbles (ex post the crisis, obviously), let's use "bubble" arguments:

  • stock markets have repeatedly experienced bubbles. A big driver of such bubbles has repeatedly been the same: shares go up irrespectively of the fair-valuation of their expected future dividends (the internet years comes to mind as the clearest example), investors buy to "ride the wave," such buying orders make the shares go up hence attract more investors in search for a profit... This is circular, the point though is that shareholders buy share of which the price is going up. They do so for a short term profit, not a long-term family-business-type investment. If investors believe the prices will go down before going up, they do not buy, they wait for a "bargain" later (hence depressing the market and helping it collapse). Investors enter the market based on short-term views;
  • investors may rationally buy just to "ride the wave," i.e. they might see the bubble but nonetheless hope to exit before it implodes (participating in a bubble can be rational if you believe this)... The longer the ride, the more numerous those who convince themselves, and others, that the ridiculous valuations have some sense in some context of some extraordinary game-changing growth with no risk. In any case, "following the trend" is a very common investment strategy, but it has nothing to do with shareholders showing a long-term approach: investors exit the market based on short-term views;
  • to sum up, investors look for bargains and wait for the market to bottom; they also attempt selling their holdings at the top; in all cases, they do so with short-term views. I know of no shareholder with a long-term goal who would keep the shares in the short term if (s)he knew the price was to go down by 20% in the next month: any one would sell the shares, wait one month, buy them back: that would still be long-term investment in shares, but with short-term-optimised returns... 

George Soros, one of the most recognised investor on the planet, said nothing else in his call for financial reform late October in the Financial Times.