By: Mike Campbell
As we reported yesterday, the US Treasury announced plans to cap the pay of top executives from firms that received public money to keep them solvent during the worst of the crisis and have yet to pay it back. President Obama threw his weight behind the move; he was quoted as saying "It does offend our values when executives of big financial firms that are struggling, pay themselves huge bonuses even as they rely on extraordinary assistance to stay afloat."
In some quarters, excessive pay and bonuses paid within the financial sector have been cited as one of the causes of the global recession – indeed, the recession was triggered by a loss of confidence in the sub-prime market; which gave birth to the concept of the “toxic asset”; loans on a financial institution’s books which were likely to be defaulted on. The argument goes that some “greedy bankers” took excessive risks in their lending policy such that they would secure hefty personal bonuses.
The US Federal Reserve hopes to put a mechanism in place that should prevent individuals at banks from taking excessive risks to earn large bonuses. The Fed wants to be able to veto the pay of an employee whose position allows them to take risks that could threaten a firm’s stability. The proposals would cover thousands of banks and not just those that received public bailout money. According to Federal Reserve chairman, Ben Bernanke, "The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system."
It remains to be seen if such a move would be practical in a global marketplace, or would serve to fetter the competitivity of American financial institutions compared to other major institutions in different jurisdictions. Right now, it would be a very popular move.
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