It is that time of the year when it is time to evaluate traders and trading groups. There is no doubt a lot of value you have brought to the trading desk, group, and especially the company.

You are probably frustrated that some of your value, and it could a lot of your value, is just not articulated well in the financial statements. Especially when you are working day and night to think through trading, hedging, optimizing, monetizing, and ……… that you know you have added value.

There a myriad of approaches to showing your value.

One way or the other, if the finance department, and/or the executive team(s) cannot understand it, then it is time to start with the basics.

Scorecards vs. Financial Statements

Most companies have two sets of books, so to speak, financial and trader scorecards. Some are deliberate and well-thought out, and some based on informal hallway conversations.

There are two approaches, generally speaking. The first is the best, but it doesn’t happen enough.

I can create and operate benchmarking hedging, or real vs. implied risks, in my accounting process and eliminate the internal book transfers from the real transactions to distinguish who owns which risk.

For clarity, that is, if you have clear ownership of the risks, the strategies being traded or hedged, I can eliminate internal book transfers across trading desks.

What I cannot do is commingle, or disaggregate, or discern your supposed value-added from the published financial statements across books. That is where it gets confusing, politics rein and frustration sets in.

For example, cost-avoidance is a big part of power marketer’s scorecards. That is not captured in financial statements.

Managing around assets for supply and/or product have value that should be measured, but are not in the financial statements.

I have been on projects where the company is swimming in spreadsheets, to disparate band-aid systems, along with running two sets of books and/or running side-show scorecard spreadsheets to help communicate why they should get a bigger bonus than the rest. I don’t disagree with scorecards. They are useful and needed in many cases.

The underlying problem is that scorecards do have to mimic the markets, not mimic market-to-market or settlement prices that traders dream-up. It has caused more damage to bonuses than many realize when, at the 11th hour of the bonus program payout I, the controller and CPA, have been asked to reconcile that mess. Yes, mess and politics – not fun, any accountant will tell you. And, it distracts accounting to add value, and to do the job many people don’t realize is much larger than trading itself.

I also know companies that say we transact as little as possible because our incentives are more aligned to entering deals correctly into the trading system than maximizing risk! Yes, that is true. The pendulum has swung from traders doing nothing, to now owning, which I agree with ownership, to enter trades perfectly or get dinged.

There is a difference between accountability and responsibility. Traders are accountable, but responsible for ever last transaction detail – not possible.

Therefore, a few companies need to work on incentive programs to align with company objectives. I can help you here to ensure alignment with company objectives.

I also see companies who believe they are adding so much value they are frustrated they cannot get other leaders outside of the trading area to understand. If that is the case, then it is up to you to create a transparent case, process and discipline to demonstrate the value.

I agree there is value, but if you can’t communicate it, it is not the accountants’ or the leaders’ lack of capability, so make it mine, and I will help you articulate your case. Recall, I am quietly a licensed CPA – shhhh.

As I have stated, I left Enron ~5 years before it blew up. I had been in the room with the “smartest guys in the room,” and they were just that.

Since I was doing cash flow analysis to scenario analysis on Enron’s Gas Book, I internalized trading and it is probably why I moved up the ranks through trading, and managing PhDs.

However, when it comes to reconciling some scorecard not tied to a market price – forget about it. I am dreamer too, but not for that endeavor.

Set up your scorecards that have underlying market prices to start. Show the trades, executed and avoided, using market prices. Do that daily. Coming back three months later, trying to wade through historical data, asking accountants to track it down, and before you turn in that revisionist history you have already signaled to the entire organization what you are doing, and whether right or wrong, it is not perceived well. Perception is more important than facts, often. Why? Human Nature.

If you have questions and frustration with getting your value understood, regardless of your role from the back-office to the boardroom, call me anytime at (303) 304-9720 to discuss your situation.