Aligning Executive Compensation with ‘Sound Risk Management and Long-term Value Creation’

As Knowledge at Wharton has reported, grumblings about executive compensation have reached a fever pitch over the past few months, with many — including President Barack Obama — laying partial blame for the current financial crisis on unchecked executive salaries and bonus packages. 

Citing Wall Street’s “reckless culture,” Obama introduced new caps on compensation for firms receiving TARP funds in February. Today, The Wall Street Journal reports that the administration is now looking beyond TARP recipients to the wider financial services sector, with the intention of formulating new 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.”

According to one administration official who spoke with The Journal, “This is not going to be about capping compensation or micro-management…. It will be about understanding what is the best way to align compensation with sound risk management and long-term value creation.”

The Journal notes that any new rules would be packaged with the Treasury’s wider upgrade of regulations concerning financial markets, which it is expected to deliver sometime in the next few weeks. 

Will it work? Although Wharton faculty disagree about the degree to which compensation should be regulated, in an article titled “Outrage over Outsized Executive Compensation: Who Should Fix It and How?” they agreed that some changes need to be made.

In the meantime, lift your spirits by listening to (or reading) Knowledge at Wharton’s interview with Leonard Abess, who, after selling a majority stake in Miami-based City National Bank last fall, took $60 million of that money and gave it out as bonuses to 399 current bank employees and 72 former employees. When asked on ABC News about his decision, Abess, who remains chairman and CEO of the bank, said, “I prefer to live in a world where this is ordinary.”