RiskMetrics Group Webcast – The Downsides to Executive Compensation Limits

RiskMetrics Group held a webcast yesterday highlighting key points for the upcoming proxy season, and much of the hour focused on the future of executive compensation.

I thought it was particularly noteworthy when one of the speakers emphasized the need for clear, direct ruling and recommendations – specifically from the SEC – on the new compensation limits and how they will be most effective. He brought up three unintended but likely consequences of the compensation limits:

  1. An executive race to the bottom – because the compensation limits only apply to companies that receive TARP funds, executives may be more likely to leave firms where their compensation is limited for firms that never had to receive TARP funds in the first place.
  2. Inappropriate emphasis on repayment – because the compensation limits only apply until the government funds have been repaid, executives may be more likely to repay the loans back more rapidly than is prudent for the interests of the firm and its shareholders so as to relieve themselves of compensation limits.
  3. Self-imposed restraints – because the compensation limits only apply to certain members of a firm such as corporate officers and directors, capable and talented executives may avoid being promoted so as not to be subject to the compensation limits.

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One response to “RiskMetrics Group Webcast – The Downsides to Executive Compensation Limits

  1. I wonder if this will create a whole new wave of accounting fraud – executives will have a great incentive for disguising/manipulating their financial statements to avoid TARP coverage.

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