Fallout: The Financial Crisis

New legislation may change exec pay

Amy Scott Jul 31, 2009
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Fallout: The Financial Crisis

New legislation may change exec pay

Amy Scott Jul 31, 2009
HTML EMBED:
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TEXT OF STORY

KAI RYSSDAL: Say this for the House of Representatives. They are not ducking out early to get started on their summer vacations. A bill the House passed today would change the way big banks can pay their executives. Shareholders get a nonbinding vote. There’s a new risk-reward curb too. The vote comes after a report from New York Attorney General Andrew Cuomo. He says some banks that got bailout money paid bonuses last year that were more than their total profits. Think about that for a second.

From New York, Marketplace’s Amy Scott has more now on what the bill could mean for Wall Street.


Amy Scott: One of the more controversial parts of this bill involves curbs on risk-taking. Regulators will be able to ban incentives that encourage too much risk. And not just for banks that accepted government aid, but any financial institution with more than a billion dollars in assets.

Lucian Bebchuk teaches law at Harvard.

Lucian Bebchuk: That’s an element that could potentially be quite consequential, depending on whether regulators indeed make substantial use of the power.

Bebchuk says regulators could force banks to tie bonuses to long-term performance rather than short-term profits.

Eric Moskowitz is a compensation consultant at Options Group. He favors some sort of claw-back provision, meaning the firm could take back some of a trader’s income if a risky bet didn’t pay off.

Eric Moskowitz: If the people are under the understanding that there’s some sort of long-term effect on the individual, who’s putting on these positions, then I think they will think about it more on a larger scale, versus looking at it as a way to make this year’s bonus bigger.

In addition to the shareholder vote on pay, the bill requires independent compensation committees on boards. Committee members would have to be free of financial ties to the company or its executives.

Compensation specialist Graef Crystal doubts the say-on-pay measure will be effective. He says boards have been ignoring shareholders for years, why stop now? And he says regulators will be up against some very smart lawyers and compensation consultants.

Graef Crystal: It’ll be Lions five, Christians zero. It happens every time. People will game the system, they’ll come up with a way to get around it.

The Senate is expected to take up the issue in September, after the summer break.

In New York, I’m Amy Scott for Marketplace.

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