How bonuses used to work

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We're a little late on this, but last week MarketWatch published an interesting contribution to the bring back partnerships debate.

Back in the partnership days, it points out that pay practices were 'less extravagant and far less controversial.'

They [advisory houses] earned profits on fees for their work. To pay bonuses, banks would set aside 80% to 90% of the company's profit each year and partners would take home a pre-determined percentage of the compensation pot. In some cases, because the banks lacked capital war-chests, partners would be paid a 6% to 8% interest on the retained capital instead of a bonus.

By divvying up the profit, partners also shared in the liabilities, such as bad stock bets or deals that wound up in legal courts. There was no public shareholder money at risk.

Nowadays, bonuses are measured as a percentage of revenues and the notion of sharing in liabilities is dead and buried.

Nor is it ever likely come back. For all the talk of malus systems and clawbacks, pay consultant Jon Terry at PriceWaterhouseCoopers says no one has seriously mooted a revival of unlimited liability partnerships.

Yves Smith at naked capitalism says this is a bad thing: "Any model that involves limited liability, other people's money, and a government backstop (which we now know is guaranteed for big players) is still a troublesome mix."