The ERM Current™

The debate over incentive compensation plans role in excessive risk taking at major corporations is heating up.  In today’s Wall Street Journal, an article provides a good overview of both sides of the debate and what companies can expect from potential government regulation.

“There’s not an easy cause and effect relationship” between pay and risk, says Don Delves, a Chicago compensation consultant. “We don’t know how to do it yet.”  Nonetheless, federal officials want companies to try. Treasury Secretary Timothy Geithner Wednesday recommended companies assess pay packages to discourage “imprudent risk-taking.” Soon after, Securities and Exchange Commission Chairman Mary Schapiro said the agency is considering requiring companies to disclose “how compensation impacts risk-taking” in annual proxy statements.

Is your company prepared to assess risk associated with pay packages?  Wheelhouse Advisors can help.  Visit www.WheelhouseAdvisors.com to learn more.

The U.S. Treasury released its proposed TARP standards for compensation and corporate governance yesterday. Among other requirements, the standards require members of the company’s board compensation committee to sign the following certification.

“The compensation committee certifies that:

(1) It has reviewed with senior risk officers the senior executive officer (SEO) compensation plans and has made all reasonable efforts to ensure that these plans do not encourage SEOs to take unnecessary and excessive risks that threaten the value of [identify TARP recipient];

(2) It has reviewed with senior risk officers the employee compensation plans and has made all reasonable efforts to limit any unnecessary risks these plans pose to the [identify TARP recipient]; and

(3) It has reviewed the employee compensation plans to eliminate any features of these plans that would encourage the manipulation of reported earnings of [identify TARP recipient] to enhance the compensation of any employee.”

TARP recipients should brace themselves for more requirements such as these.  In addition, board members should begin educating themselves about their new responsibilities and potential liability.  Wheelhouse Advisors can help your institution navigate the new requirements successfully.  Visit www.WheelhouseAdvisors.com to learn more.

Reports about new regulations on compensation practices at U.S. financial institutions emerged today in the Wall Street Journal.  Evidently, the Federal Reserve is working on new rules designed to reduce excessive risk taking such as incentives for mortgage loan production that fueled the current economic crisis.  Here is what was reported.  

Among ideas being discussed are Fed rules that would curb banks’ ability to pay employees in a way that would threaten the “safety and soundness” of the bank — such as paying loan officers for the volume of business they do, not the quality. The administration is also discussing issuing “best practices” to guide firms in structuring pay.

Government officials said their effort, which is just beginning, isn’t aimed at setting pay or establishing detailed rules. “This is not going to be about capping compensation or micro-management,” said an administration official. “It will be about understanding what is the best way to align compensation with sound risk management and long-term value creation.”

Solid corporate governance practices and effective risk management programs should be enough to limit excessive risk taking through well designed compensation plans.  However, it seems the U.S. Government is not convinced that companies will navigate the proper course.