Executive Compensation-Treasury Expresses Its Thoughts On How Executive Compensation Should Be Improved

A press release, dated June 11, 2009, contains a statement by Gene Sperling, Counselor to the Secretary of the Treasury, which outlines the Treasury Department’s thoughts on how executive compensation should be improved to avoid further adverse effects on the economy. The statement was made at a hearing of the U.S. House of Representatives Committee on compensation practices.

The statement indicated that one contributing factor to the current economic crisis has been excessive risk taking, which is attributable to compensation practices at financial institutions that encourage short-term gains to be realized with little regard to the potential economic damage that could be caused. What is most important for the economy now is understanding how compensation practices contributed to the economic crisis, and what steps can be taken to ensure that these practices do not cause excessive risk-taking in the future.

The statement noted that Treasury Secretary Geithner has laid out a set of principles for moving forward with compensation reforms. The goal of these principles is to help ensure that there is a much closer alignment between compensation, sound risk management and long-term value creation for firms and the economy as a whole. These principles are the following:

–compensation plans should properly measure and reward performance

–compensation should be structured in line with the time horizon of risks;

–compensation practices should be aligned with sound risk management;

–golden parachutes and supplemental retirement packages should be reviewed and rewritten to align the interests of executives and shareholders; and

–transparency and accountability to shareholders should be promoted in setting compensation.

The statement discusses each principle in some detail. The press release containing the statement may be found here.