New Rules on Pay Practices

This past weekend reports surfaced about new rules on limiting executive pay at financial institutions that received taxpayer assistance. The rules are expected to be promulgated by the U.S. Treasury as reported by Reuters below.  

Treasury Secretary Timothy Geithner is expected to issue rules as early as next week on how bailed-out banks must limit their executives’ pay. He is also working on ways to reform the compensation practices of the entire banking industry to discourage a focus on short-term gains and undue risk-taking.

Lucian Bebchuk, a professor at Harvard Law School, and colleague Holger Spamann argue that a banker’s pay should be tied to all of the bank’s assets, not just to equity, which they say accounts for only about 5 percent of overall assets.

“Banking regulators should monitor executive pay in banks, and prevent arrangements that incentivize top bankers to focus only on the bank’s equity, which … can gain through strategies that are detrimental to the other 95 percent,” they write in a forthcoming paper.

Bebchuk and Spamann suggest top bankers should be paid on a “broader set of claims, including deposits and junior debt,” which would prod them “to place much greater weight on possible losses in their choice of strategy.”

These new rules on executive pay most likely will serve as extra incentive for financial institutions to return taxpayers’ money as opposed to lasting changes in pay practices. True changes must emanate from within the financial institutions’ corporate governance structure beginning with pressure from the boards of directors.  

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Wheelhouse Advisors LLC is the publisher of The ERM Current™, an online publication and blog dedicated to providing the latest updates on current trends in Enterprise Risk Management & Control. Wheelhouse Advisors provides cost-effective Enterprise Risk Management & Control solutions to both large and mid-size corporations. To learn more about Wheelhouse Advisors, please visit our web site at www.WheelhouseAdvisors.com.

2 Responses to New Rules on Pay Practices

  1. euandus says:

    Remember it is a strategic competitive advantage to the stronger banks that the weaker ones have their exec comp limited… I don’t think Barak Obama will stand up to the execs at the stronger banks. I’ve just posted on this, in case you are interested.

  2. euandus says:

    I argue that reforms are needed because execs have too much power over corp governance. Ironically, the reforms would bring corps closer to the public interest. Anyway, I’ve just posted on it. If you are interested, you might check out the following: http://skipworden.wordpress.com/2009/10/24/corporate-partisanship-eclipsing-the-public-interest/

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