Europe plans to cut bonuses to bankers in order to discourage the kind of behavior that led to the financial crisis. Bonuses cannot exceed the annual salary under the plan. Bankers are already getting around the bonus cap by raising salaries. This editorial suggests that it would be more effective to link bonuses to longer term performance and to clawback bonuses dependent upon longer term performance.
The Dodd-Frank bill gives government the power to deal with compensation plans that encourage excessive risk. Like many other concepts in the bill, government agencies must define inappropriate compensation. As one might imagine, the banking lobby will work hard to define inappropriate compensation so that it is relatively toothless. Some banks have taken steps to implement clawbacks for self protection. Most have not.
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