WSJ headlines and questions for February 7 2011

WSJ headlines and - The FDIC will vote on the rules on Monday and they have to be approved by other regulatory agencies which is expected given

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WSJ headlines and questions February 7, 2011. WSJ Headline February 5-6. U.S. Seeks to Defer Portion of Bonuses U.S. regulators will propose that large financial firms with assets over $50 billion (meaning large financial services holding companies) hang on to at least half of the bonuses paid to top executives for at least 3 years. This would also affect the bonuses of lower-rung employees who are capable of inflicting “material risk” on the firms and defer part of their bonuses as well. The firms would then have to review the results of trades or other business decisions tied to the bonuses over the deferral period. If losses occur, the firm would have to reduce or eliminate the bonus payments. Firms with less than $50 billion in assets would be subject to a less proscriptive version of the rules. The goal is to reduce the incentives of employees to take on risk by making their compensation depend on the longer-term losses resulting from their decisions.
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Unformatted text preview: The FDIC will vote on the rules on Monday and they have to be approved by other regulatory agencies, which is expected, given that staff from all of the agencies were involved in drafting the new rules. Over the last few years, many of the large financial service holding companies started doing versions of this deferred compensation already. For example, Morgan Stanley already defers about 60% of bonuses. Questions: 1. Should the government be deciding on the shape of compensation to reduce risks? Are there other ways to get banks to reduce risk? 2. Will the new rules encourage decision makers to take on fewer risks and take on the more long-term interests of the firm? 3. Will the large firms react by increasing base pay to offset some of the expected losses of bonuses? Won’t this misalign incentives to maximize profits or shareholder wealth by making pay less dependent on firm performance?...
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This note was uploaded on 07/02/2011 for the course FINA 465 taught by Professor Berger during the Spring '11 term at South Carolina.

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