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ASET Sep 2009 q2

A

ALEX_AK

Member
The answer for question 2 on effects of higher equity values talks about higher cost of smoothing due to being nearer the top of the smoothing cycle. I do not understand what is the meaning of smoothing cycle here? Can anyone enlighten me?
 
The answer for question 2 on effects of higher equity values talks about higher cost of smoothing due to being nearer the top of the smoothing cycle. I do not understand what is the meaning of smoothing cycle here? Can anyone enlighten me?
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The smoothing cycle represents the cycle in smoothing bonuses down in good years and up in bad years reflecting the economic cycle as share prices go up and down.

In part (d) we have just experienced higher than expected equity returns. So we would probably be smoothing bonuses downwards at the moment. We are at the top of the smoothing cycle because we probably expect equities to fall back and hence be smoothing bonuses up in future years, ie we have just experienced a boom in the economy and are now going to move towards a slump.

Best wishes

Mark
 
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