from Greenberg Center for Geoeconomic Studies

Regulation of Executive Compensation in Financial Services

February 22, 2010

Report

Overview

Many people argue that inappropriate compensation policies in financial companies contributed to the global financial crisis. Some say the overall level of pay was too high. Others criticize the structure of pay, claiming that contracts for CEOs, traders, and other professionals induced them to pursue excessively risky and short-term strategies. This Working Paper, the eighth in the Squam Lake Working Group series distributed by the Center for Geoeconomic Studies, argues that governments should generally not regulate the level of executive compensation at financial firms. Instead, a fraction of compensation should be held back for several years to reduce employees’ incentives to take excessive risk.

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