Obama Executive Compensation Reforms: Chickens Coming Home to Roost

By Paul Hodgson, Chief Research Analyst

According to a Reuters report this morning, President Obama has his sights set on executive compensation reform as a further move to prevent risky behavior being incentivized in the financial services sector. In an interview with Rolling Stone magazine, Mr. Obama said: “The single biggest thing that I would like to see is changing incentives on Wall Street and how people get compensated.” It’s questionable, even after enactment of Dodd-Frank reforms, that those incentives have completely been changed, he added. The President continued: market stability is still at risk if the traders making risky bets are rewarded if the bets pay off but face limited consequences if those bets destroy value in the long-term. “It tilts the whole system in favor of very risky behavior,” he said. “By the time the chickens come home to roost, they’re still way ahead of the game.” The President recognized that it might be difficult for Washington to enact legislation that would precipitate compensation reform, and that shareholders and directors would need to be involved. The lack of pay consequences for the risky behavior that led to the financial crisis and the subsequent continued risky behavior as evidenced by the spate of banking scandals besetting the sector is the subject of this Bloomberg op-ed from earlier this month. Ironically, as I discovered, many of the banks already have standards that would require the return of incentives if they turn out to be based on illusory performance, but few if any of those standards have been applied to the most senior and highly-paid executives. It is debatable whether legislation would make these standards stronger, but it is good to hear that this continuing problem is being recognized by the administration. Something needs to be done, at the very least along the lines of the reforms to banking pay that have been enacted – voluntarily in many cases – at the European banks, as I noted in this CII white paper.

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