The way Mark Rodrigues sees it, a trained ape could probably make money working the trading desk at a prestigious bank.
Mr. Rodrigues, a vice president of AMS Management Systems, London, is one of a growing number of compensation experts beginning to question the rich pay packages being lavished on traders. They see traders as mercenaries cashing in on a bidding war for their services between commercial banks and investment banks-which have yet to develop reliable ways of measuring the traders' performance.
Traders "have the loyalty of a housefly," Mr. Rodrigues asserted at a recent bank conference in New York.
With the pay packages now starting to crimp the earnings of bank units that deal in derivatives, currency exchange, and similar products, Mr. Rodrigues and others like him are starting to push for reform in the way compensation is determined.
"The way we pay traders today is a total outrage," said Colin Lawrence, head of global risk management at BZW and a former derivatives trader at UBS Securities.
Gene Shen, managing director at Whitney Group, a New York headhunting firm, says pay for derivatives traders rose 10% to 20% in 1996, after a lull in 1994 and 1995. The rise has been fueled by booming business at Wall Street brokerages, and by commercial banks raiding these brokerages in their quest to build investment banking operations.
At Bankers Trust New York Corp., compensation costs soared 41%, to $261 million, in the fourth quarter.
And J.P. Morgan & Co. told investors that disappointing third-quarter revenues were due in large part to high prices the commercial bank had to pay for investment banking talent.
Judah Kraushaar, bank analyst at Merrill Lynch & Co., said exact numbers are difficult to come by because different banks measure compensation differently. But he said the overall trend up "is big enough to be noticeable."
He added that derivatives and currency trading weren't the only areas that experienced pay gains. Growth in corporate finance and securities underwriting also has had an impact.
The current system of paying traders who engage in high-risk transactions is at odds with the interests of shareholders, Mr. Rodrigues says.
Some 80% of traders' pay comes from bonuses that reflect overall trading profits, according to a survey AMS conducted a year ago. Emphasis on bonuses encourages traders to take greater risks like buying more complex derivatives, which can pay off in the short term but whose potential for loss may not be felt for years-long after most traders retire or go elsewhere.
Trading desk turnover averages 30% per year, Mr. Lawrence said. High stress is always a reason, but turnover is also accelerated by bidding wars that periodically erupt on Wall Street.
Deutsche Bank is the latest to up the ante, spending 200 million marks ($122 million), according to sources, to build its investment banking operation.
While price wars could reflect the cost of quality traders, Mr. Lawrence cautions there is no clear-cut way to separate the talented traders from the mediocre. A trader could have a good year because he's good, or the product he's selling is hot, or his bank gets a lot of business by virtue of its reputation.
But reforming the system will be difficult, bankers acknowledge. Publicizing compensation levels could give banks a better idea of market price. But no one has forgotten what happened when Salomon Brothers publicized new pay limits for traders in 1994: Many left for banks without such constraints.
When Mr. Rodrigues asked if any bankers at the conference planned to share compensation information, none raised their hands.
For now, there may be little reason for banks to trade notes. Pay for traders may be rising, but the revenues traders bring to banks are rising faster, said Raphael Soifer, a trading bank and brokerage analyst at Brown Brothers Harriman.
Typically 50% of trading banks' revenues goes to compensation, he said; and despite rising salaries and bonuses, that number has risen to only 51% in the past year. He added that certain brokerages, such as Donaldson, Lufkin & Jenrette, did so well in 1996 that their compensation/revenue ratios dropped.
To get a better handle on which traders are really worth the skyrocketing salaries, Mr. Lawrence urges banks try to assess the amount of risk traders take for the return they deliver. But he said banks shouldn't overlook old-fashioned subjective "scorecards," complete with observations from supervisors.
In the brutal world of investment banking, scorecard comments can be a good way to lose an unwanted trader, Mr. Lawrence said, although not in the way you might expect.
"If you want to get rid of someone, you might give them a good recommendation," he said.
Deutsche Bank's shopping spree notwithstanding, Mr. Shen of the Whitney Group said European and Japanese banks that have set up shop in America have done the best job in controlling pay and keeping their best talent from jumping ship to another shop.
Several banks, including reportedly Bankers Trust, have stemmed the rising compensation tide by offering traders stock in the company's investment banking operations. Bankers Trust executives were unavailable for comment. Deferring compensation over several years is also a common feature at many banks.
Swiss Bank Corp. developed an innovative system for paying its traders after merging with investment bank S.G. Warburg.
Every three years traders are vested with synthetic stocks whose value is tied solely the investment bank's performance, said Charles E. O'Dell, executive director in charge of global compensation at SBC Warburg. If traders stay two years, they get no stock. If they stay four, they get three years' worth. If they stay six, they get all six years.
The plan, which Mr. Soiffer called an "extreme" version of several already in existence, has helped bring turnover down to one-third the industry average, Mr. O'Dell said.