Shareholder Group Says Pay Practices at Banks Fueled Risk-Taking

The Council of Institutional Investors, which represents about 130 pension funds, has shown that pay practices at major Wall Street banks likely helped drive excessive risk-taking by executives and contributed to financial collapse in 2008.

(November 30, 2010) — A report by the Council of Institutional Investors, which represents about 130 pension funds, asserts that pay practices at major Wall Street firms have fueled excessive risk-taking by executives.

The report, by Paul Hodgson, senior research associate at The Corporate Library, covered Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. It found that financial firms linked too many of their pay practices to short-term results. Additionally, the survey asserted that many of these firms inflated salaries to offset the impact of regulatory controls put in place after the 2008 market meltdown.

“The global financial crisis that erupted in 2008 cast a harsh light on executive compensation at many Wall Street banks,” the report, titled “Wall Street Pay: Size, Structure and Significance for Shareowners,” stated. “Legions of executives pocketed large compensation packages or departed with generous severance payments even as their banks descended into bankruptcy or were bailed out by the federal government.” The report concluded that the size and structure of these pay packages offered perverse incentives that helped drive excessively risky decisions that pushed financial markets to the brink of disaster.

As institutional investors have become increasingly vocal about pay practices following the 2008 financial crisis, the report may help inform shareowners’ decisions about how to cast advisory votes on executive compensation at US public companies. While the increased pressure has succeeded in pushing Wall Street firms to revise their compensation structures, the report concluded that the changes in the US might not be enough to help prevent future crises. “While many banks have strengthened their pay practices, there’s still a long way to go,” Amy Borrus, deputy director at the Council of Institutional Investors, told the Wall Street Journal. “The report suggests they need to do more to make sure that executive compensation rewards performance over the long term.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742