Regulation will affect compensation and, of course, bonuses. We have already seen an increase in the base salary of individuals at all levels, from associate to managing director. Bonuses will no longer be “as high as what they used to be” for most people for the time being, although firms will need to be creative to retain talent. Take the example of  traders for instance. Their compensation used to be based on a flawed practice called "front end the fees and push back the risks". The bonus pool of the traders was determined as if the gains for the bank on long dated transactions could be calculated with certainty as the present value of current and future fees and profit margin, ignoring the cost of hedging the risks in normal market conditions, and also ignoring potential losses due to market disruptions during crises when liquidity dries out and hedges cannot be rebalanced. Bonuses were distributed without claw-back clauses which would have given the right to the bank to take back part of the distributed bonuses when the position initiated by the traders years ago lost money because of hedging failures. The Dodd-Frank Act intends to correct this anomaly by not only spreading the distribution of bonuses over several years, but also paying part of the bonuses in shares also to be vested over several years, and with claw-back  features where future payments would be reduced by the losses incurred on the trading positions. Obviously, this new compensation scheme would better align the interests of the traders/management with those of the shareholders and the taxpayers.

Linda Kreitzman, from Berkeley, 2/14/1012