Open Books: Compensation policies encouraging excessive corporate risk-taking now face reform
Compensation policies that encouraged excessive corporate risk-taking now face reform.
August 31, 2009 at 08:00 PM
25 minute read
Like a house of cards, all it took was one faulty piece to bring the whole company down. When insurance giant AIG collapsed in September 2008, experts knew exactly where to place the blame. Not on the entity that insured vacationers' lost baggage or the one backing purveyors of renewable energy. It all boiled down to the risks taken by one division insuring mortgage-backed securities.
And senior management took that risk for good reason: Deals that resulted in billions of dollars in AIG losses netted $165 million in bonuses for executives in that troubled division–after the company had received roughly $180 billion in government bailout funds.
The catastrophic losses at AIG, as well as at other companies aided by the federal Troubled Asset Relief Program (TARP), compelled the Securities and Exchange Commission (SEC) to propose a new rule in July that aims to shed light on how a company's compensation practices relate to its risk profile. If passed, the rule will require public companies to disclose these relationships in their annual proxy statements to shareholders.
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