We Should Offer Banks a Choice on Exec Pay

Either let US set limits, or make firms set aside cash: economist
By Clay Dillow,  Newser Staff
Posted Nov 4, 2008 10:33 AM CST
Democratic presidential candidate Sen. Barack Obama and his party refused to approve the $700 billion bailout until executive pay was addressed and "golden parachutes" barred.   (AP Photo/Alex Brandon)
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(Newser) – Regardless of who wins today’s election, one issue from this campaign will continue to burn hot with investors, Andrew Ross Sorkin writes in the New York Times. Both candidates have blamed executive pay for the financial collapse, as execs are rewarded for risk-taking while rarely penalized for failure. But a University of Chicago finance professor has suggested an approach that might just work.

Banks are given a choice: Under one option, the government strictly regulates pay formulas. Under the other, the banks are free to pay however they want but are required to hold more capital in reserve, reducing the risk that bad decisions will bury the bank. “In other words, banks that cling to their free-wheeling ways would have to pay some sort of price,” Sorkin writes.