Compensation Structure and Ethical Responsibilities

Hard Cfa Institute Code And Standards Employer Duties - Compensation

As a portfolio manager at an investment firm, you are tasked with performing due diligence for a new client account. Your firm has a compensation structure where a significant portion of employee bonuses is tied to the performance of the accounts they manage. This structure creates pressure on managers to generate high returns, even if it means taking on excessive risk or engaging in unethical behavior to meet short-term performance targets.

During a team meeting, you discuss this situation with your colleagues, stressing the importance of remaining compliant with the CFA Institute Code of Ethics and Standards of Professional Conduct. You question whether any adjustments could be made to the compensation structure to promote more ethical decision-making and long-term client interests without compromising the firm’s profitability.

Which of the following actions would be the MOST appropriate for you to recommend to align the compensation structure with the ethical responsibilities outlined in the Code and Standards?

Promoting a compensation model that guarantees minimum bonuses based on prior year’s performance regardless of current market conditions.

Suggesting a shift towards a compensation structure that includes metrics focused on risk-adjusted returns and long-term client satisfaction.

Encouraging managers to focus their efforts on maximizing returns in the short term, as client expectations are based primarily on immediate performance.

Hint

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