Recently reading the New York Times article CEOs and the Pay-’Em-or-Lose-’Em Myth I couldn’t help but think how very different this is for traders.
The article covers how peer group benchmarks are often used to define appropriate pay brackets and how this is indeed a big driver for the ever increasing compensation that is being seen. The reasoning behind this has been due to the idea that you have to pay ’em or lose ’em.
Recent research shows that the fear is bogus as CEOs rarely are able to transfer their skills to the new company and in fact often flop in their new roles. The use of peer group benchmarking only pushes their pay up.
The authors of the study even show that there are numerous examples that there isn’t really a hot market for interchangeable CEOs and that selection from within the company usually means better performance than that gained by choosing an outsider.
“There is no conclusive empirical evidence that outside succession leads to more favorable corporate performance, or even that good performance at one company can accurately predict success at another…. In short, executive skills cannot pass the most basic test of generality: transferability.”
Compare and contrast this to a (large) independent trader. It is completely performance pay. A certain level of confidence can be obtained by a track record but the trader knows that the past is no guarantee of the future. Traders eat what they kill and if they don’t hunt well then there is no pay. Ivy League education and benchmarking is irrelevant. The market will not bow to your wishes however good you think your Jedi mind tricks are. Which is why historically commodity trading legends from Chicago come from all levels of society’s strata. Working class boy or Ivy League background – performance based on skill, grit, and determination is all that counts.
This kind of pay debate is largely irrelevant to a trader. If you aren’t comfortable with the harsh judge that the market is then you are in or looking at the wrong business.