3 Compensation arrangements that created high-powered incentives using rewards dominantly based on equity had their origins in efforts to align better management and shareholder interests. And compensation arrangements that rewarded incentives for loan officers to write more loans or traders to generate more trading revenue were grounded in efforts to increase firm profitability.
But the revenues that served as the basis for calculating bonuses were generated immediately, while the risks associated with these revenues might not have been realized for months or years after the transactions were completed.