What is a high water mark?

and A high water mark is a financial term used to describe maximum account performance or investment. Lending the term from the flood terminology is often used a high water mark to determine the structure of remuneration and bonuses for financial managers. It is important to understand how high water signs theory is used to make sure that the financial manager receives paid on the basis of real performance.

The term comes from the flood water measurement. The water mark indicated the highest point at which physical evidence, such as color or sudden change in vegetation, showed that the water has increased. Finding the highest water brand could determine the exact height of the previous flood.

In general, this term is used to describe the previous high -performance peak of the account. For example, if an investment account was worth $ 50 in USD (USD) and increased to $ 75 during the year, a high water mark would be $ 75 and financial manager could be awarded bonuses to increase $ 25 out of frontthe Ozi Standard. Next year, if the account value dropped to $ 70, no bonus could be granted for performance.

Using the same example, it is important to realize that $ 75 would remain a high water mark, even if there were losses that changed the annual account value. Imagine that the account value has fallen by three years by $ 60. In the fourth year, if the value increases to $ 80, the performance bonus would only include an increase in USD from the old high mark to a new one, not $ 20 from a lower annual value to the new water sign. If the losses were taken into account, managers could get larger bonuses by having large losses and marginal profits, unlike profits.

The aim of this bonus strategy is to protect investors carefully the salary line for the investor's profits. This makes managers justified interest in the performance of the account because their bonuses are connected to their performance. The use of high water signsInstead of setting up bonuses for simple annual profits, they prevent managers from collecting money on accounts that have lost money overall. As long as the account stays under the water sign, he technically did not earn any money, even if the profits have been reached since the previous year. Until it exceeds the high water brand, the account is leveled only for losses to provide net profits.