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It makes sense when you put it that way. I guess the issue is not so much risk tolerance as cynicism. It is a negotiation where the information asymmetry does n
by marssaxman 10y ago
It makes sense when you put it that way. I guess the issue is not so much risk tolerance as cynicism. It is a negotiation where the information asymmetry does not favor me. The potential employer must be offering a variable compensation package with a claimed EV of $X because they believe their actual cost will be less than $X. Otherwise, why make it complicated? They'd just offer $X. I conclude that the only actual knowledge I have about the value of the offer is that it won't be lower than the base salary. I therefore accept the offer if the base salary is high enough to make the job worthwhile, and reject it otherwise. Any additional money which might happen to come along later I treat as a windfall; it has no incentive effect.
- harryh 10y agoOtherwise, why make it complicated? They'd just offer $X. The reason that this is done is because investment banks tend to have larger revenue swings than many other businesses. Due to this, they want to be able to more easily adjust their costs (of which people are a huge %) relatively easily. It's much easier to adjust bonuses up and down than base salaries.
- deleted 10y ago[deleted]
- thedufer 10y agoThat seems a little extreme. The reason they do bonuses is because in a bad year they can pay you 0.5x and in a good year 1.5x. You still get an average of x per year, but in such a way that they don't go out of business. Finance companies tend to see much larger revenue swings than other industries. My current employer gets over this hurdle by guaranteeing your bonus for 1-2 years, thus giving them time to build trust before the variable compensation gets going.