Bank Exec Bonuses Under Scrutiny

Recently, the Obama Administration expressed its desire to complete a regulatory overhaul of the financial system. As part of that overhaul, some are considering that regulators may need more power to limit bank bonuses.

Tying bank executive bonuses to risk

One of the issues right now is the fact that executive bonuses are not usually tied to risk. This means that bank executives could get paid big bucks for moves that may mean immediate profits, but bring on added risk down the road — risk that could lead a financial market meltdown like we saw last year. The scrutiny comes as severance packages and bonuses are paid to executives who may not have made the best business decisions. And, in the view of the American people, it adds insult to injury that many of these bonuses are being paid with taxpayer money.

Pay is a big deal, since it is a major part of corporate finance. And, while it might be a slippery slope to have the government start getting involved in compensation, it might make sense to require some measure of accountability for risks that may appear down the road, especially if the taxpayer is going to be on the hook for pulling them out of the fire when things get too hot to handle.

In the end, businesses can’t have it both ways. If they want the government to help prop them up and keep them from failure, they may have to accept that they won’t be able to pay executives the same sort of bonuses that have prevailed on Wall Street in recent years. If banks and other companies really want to be able to let the “market” determine their compensation, perhaps they need to be more willing to accept the consequences (i.e. the collapse of their companies) of failure to fully consider risks.

Image source: coda via Flickr