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Expert Perspective by Grahall’s OmniMedia Editorial Bard

expert perspective telescopeEric Dash’s November 5, 2009 article  Some Wall Street Year-End Bonuses Could Hit Pre-Downturn Highs  shares the results of a study by Johnson Associates that finds: “This will be an unusually lopsided year for [Wall Street] bonuses. While traders are looking forward to fat bonuses, payouts for people working in asset management, corporate and retail banking and the insurance businesses are expected to be flat or even down, according to the study.  Given the decline in the once-booming mergers and acquisition business, bonuses for certain dealmakers could fall 10 to 15 percent. And the once-gilded paychecks of hedge fund managers are expected to decline 15 to 25 percent. Private equity executives will be among the hardest hit, with their year-end bonuses falling 20 to 25 percent…”

You would find few people who would pity the poor hedge fund managers and private equity executives who see a decline in their 6 and 7 figure bonuses, but it is interesting to note that the hedge fund business is the absolute epitome of pay for performance. Hedge Fund executives don’t get bonuses unless they make money for their investors AND increase their investors’ assets year over year.   Unlike other financial services businesses, they don’t reward relative performance. 

Grahall recently completed a survey of hedge funds focusing on compensation practices.  A summary of the results of this study will soon be available on our website.  Findings include the fact that most participants believe that the compensation practices did not anticipate the problems of 2008 and that the rate of change in compensation practices hedge funds will be greater going forward, influenced by:

1) Pressure to recapture performance fees by exceeding previous high water marks
2) Necessity to restructure staff costs to reflect firm income coupled with partner reluctance to find compensation pools in excess of available income
3) Recent IRS drive restrictions on deferred compensation and the anticipated changes in the treatment of capital gains and off shore income

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