Big City law firms are increasingly offering clients deals such as fixed fees or rates tied to the success of transactions, reports the FT’s Michael Peel, who cites Freshfields’ Tim Jones as saying that lawyers are under pressure to offer alternatives to hourly charges as clients seek to cut costs.
But hourly charges is exactly the way bankers should be moving, argues William Cohan, author of The Last Tycoons: The Secret History of Lazard Frères, in an FT comment piece.
The former investment banker places the blame for the current financial crisis - and a host of others, including the internet bubble and the telecoms bust - on Wall St’s compensation system. With perverse incentives exacerbated by a lack of accountability, huge bonuses are deposited and consumed long before the bad deals they generated slam into investors.
But Cohan has a solution:
What is a remedy for this vicious cycle? At the risk of seeming disingenuous, since I benefited from this system for 17 years, I propose an extreme makeover for compensation. M&A advisers should be paid by the hour for their advice, just as their well-paid deal colleagues in the legal and accounting professions. This would rein in unnecessarily massive M&A fees and return to the days of unbiased advice. Changing compensation for bankers who innovate and sell financing is harder but must include a way to hold back a large percentage of the pay until - and when - the success of the product can be determined over time.
Similar sentiments have been expressed recently, notably by Martin Wolf and Raghuram Rajan, drawing some applause and quite a bit of outrage - not least from the Epicurean Dealmaker.
Clearly, this debate has not yet run its course.
