This is Steve Cohen at a charitable event before the insider-trading thing, by the way.

Steve Cohen Will Pay Extra for Compliance Tips

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Point72, Steve Cohen's family office that houses the remains of SAC Capital, decided to troll everyone by declaring that up to 4 percent of its employees' annual compensation will depend on their compliance with the law. This is a significant increase from the previous well-documented standard of zero percent. Somehow a Point72 spokesman actually talked to Bloomberg News about this development, and sounds proud of it, which is itself an interesting data point. Bess Levin has the definitive analysis.

How did this happen, you might well ask. There are some obvious answers. For one thing, a culture of compliance at Point72 really might be a delicate bud that needs to be carefully nurtured with constant cheerleading and incentive programs. For another, I mean, it's not impossible that Steve Cohen spends an hour a day thinking up ways to annoy everyone, is it?

But also, we are very much in a moment that believes in the magical powers of incentives. Pay structures have become a scapegoat for cultural issues in the financial industry, and reformers put a lot of hope and effort into changing the industry by changing those structures. This is particularly pronounced in Europe, where for bonuses are blamed for much of the risk in the banking system. So banks are limited to paying bonuses of one or two times base salary, and notions of clawback and malus -- a negative bonus, meant to penalize bad behavior the way a bonus rewards good behavior -- are popular in rules, if not in practice.

There's something to all of this: You do get what you pay for, especially when the people you're paying understand incentives. Politicians didn't make up the idea of asymmetric compensation in banking. Every trader is keenly aware that her compensation is an option on her portfolio.

But there are limits to the power of compensation schemes. People in finance who make a lot of money for their employers get paid a lot of money, and it turns out that a lot of ways to make money for your employer are risky or illegal or ethically challenged. That's not a fact about bonuses or schemes or structures. That's a fact about markets, and about the sorts of people who work in an industry whose subject matter is, after all, money. You could mandate that everyone be paid a fixed annual salary, and then the people who made a lot of money for their employers one year would get big raises the next year, and the monetary incentives to make money would remain. There are margins at which structures can align incentives or reduce the rewards to risk, but the incentives will always be skewed: Your employer can always reward you more for making money than it can punish you for losing it.

Of course, you also have incentives not to go to jail, or get fired. But the pool of money for paying for compliance is limited. Like, when I was a banker, every single day, I refrained from insider trading. And that made me, and my employer, zero dollars. Even if the expected value of insider trading was negative, which it might well be, the avoided losses didn't generate any actual dollars with which to pay me.

But compensation as a way to influence behavior is in vogue now, and so it gets a lot of pretty obvious lip service. Europe's bonus caps are famously, and amusingly, permeable, and will undoubtedly provide a lot of entertainment to lawyers and structurers as they figure out ways around them. And now Steve Cohen is going to pay his employees up to 4 percent of their salary, "If they demonstrate adherence to the firm’s compliance policy and ethical standards, contributions to the community and repeated strong investment performance."

Wait, what? That's not even a compliance bonus. It has "strong investment performance" right in the description! "Employees can earn the bonus by, for example, raising issues with compliance, suggesting policy changes and serving on charitable boards." Serving on charitable boards is great! If you make many millions of dollars a year, you should probably do that. It has nothing to do with hedge-fund compliance, unless you're on the board of Hedge Fund Compliance Officers Without Borders. It certainly won't prevent you from insider trading, as Rajat Gupta or, I mean, Steve Cohen could tell you.

The 4 percent thing, the charitable boards, the "strong investment performance": Point72 is at least transparent about the fact that its pay-for-good-behavior program is not meant too seriously. But how could it be?

  1. Really, this could be more direct than putting it in end-of-year compensation. You should get, like, a crisp $5 bill every hour that you don't break the law.

  2. For "good behavior," read "making money." For "bad behavior," read "losing money, or doing bad stuff and getting caught by regulators."

  3. I generically think it is. But if I asked you, "How much money did SAC Capital make from insider trading over the years, net of the penalties it paid?," what would your answer be? I think it's unknowable, but most people would probably guess a very large positive number.

  4. At a big bank, where the expected value of legal settlements these days run into the billions of dollars a year, you could imagine paying people eight-digit bonuses for avoiding one of those settlements. But "How much would we pay if we'd broken the law?" is a tough counterfactual to figure out -- especially since those penalties are weirdly arbitrary! -- and in any case the penalties tend to come many years after the fact. "I'll be gone, you'll be gone," the well-behaved trader can say wistfully about his bonus for not manipulating Libor.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at

To contact the editor on this story:
Zara Kessler at