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bonuses paid were unreasonable. Mr. Hakala based his opinion on
compensation practices in the investment industry. He opined
that, in the investment industry, management is typically paid 20
percent of pretax profits as incentive compensation. Mr. Hakala
opined that 20 percent of petitioner’s pretax profits would have
been reasonable as incentive compensation for all of petitioner’s
employees. Mr. Hakala split the resulting pool of incentive
compensation 60/40, with Mr. Wechsler receiving 40 percent as a
reasonable bonus. Thus, in Mr. Hakala’s view, a reasonable bonus
for Mr. Wechsler during the years at issue would have been equal
to 40 percent of 20 percent of petitioner’s profits (8 percent of
petitioner’s profits). While we agree with Mr. Hakala’s
percentage-of-profits approach to determining incentive
compensation, we think his allocation to Mr. Wechsler is
unreasonably low.
That allocation aside, we agree with Mr. Hakala’s
percentage-of-profits approach for the following reasons. During
the years at issue, petitioner engaged in a range of activities.
The company acted as a broker earning commission income, as a
market maker earning income through the spread between its bid
and ask prices, as a selling agent for underwriters, and as a
proprietary trader exploiting sophisticated investment strategies
in the convertible bond market. As Mr. Hakala has shown, the
concentration of petitioner’s operations make it distinguishable
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