According to a recent article in InvestmentNews.com, rising salaries along with huge bonuses helped “push” traders to make riskier investments and also “limited regulators’ ability to lure top talent to police banks.” These finding were reported by the Financial Crisis Inquiry Commission who were tasked with discovering the origins of the financial crisis.
This was also echoed by the Council of Institutional Investors, which stated “compensation practices at the six largest U.S. banks have worsened since the credit crisis. As regulators encouraged higher base salaries and firms didn’t properly tie bonuses to long-term performance.”
According to the Crisis commission’s findings, “regulators had difficulty recruiting financial professionals, who could earn more working in the private sector.” Former CEO of Citigroup Inc, Sanford Weill, told the commission that “the dangers of the new pay structures were clear, but senior executives believed they were powerless to change it.” This lead to a culture where executives believed that if one bank was doing something, then they felt they had no choice but to do it as well.
Currently regulators, including the Federal Reserve and the SEC, are drafting a new set of rules on pay structures that are aimed at limiting the practices considered to be risky. Financial watchdogs “found that many banks were deficient in curtailing risk-taking” that helped lead the economy into the worst financial crisis since the Great Depression. The FCIC said, “stock options and other incentives tied to a company’s performance encouraged risk-taking because gains for the employees were much greater than the worker’s potential losses.”
The size of salaries and bonuses on Wall Street became the point of public outrage in the wake of the 2008 government bailout of the banks. Lawmakers responded by including limits on executive compensation in drafting the Dodd-Frank Act, but “stopped short of setting pay caps and instead called on regulators to write rules banning any pay structure that encourages inappropriate risks.”
While more attention is being paid to the amount of risky products placed on balance sheets, much of the same practices are still being implemented. Many financial institutions still have compensation packages that pay “employees enormous sums of money for short-term success, even if these same decisions result in significant long-term losses.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in investment-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their investment problems. For further information, please contact us.