There are compensation strings in TARP 1, which were tightened by the Obama administration’s financial sector rescue outlined two weeks ago and further toughened by rules amended by Sen. Chris Dodd (D-CT) in the stimulus bill recently signed into law. The problem with all the strictures and limits and clawbacks is that they don’t address the heart of the problem: how to reduce the risk factor in setting compensation policy.
“We’ve got the government in the quicksand of compensation,” notes Mark Poerio, partner in the employment department at law firm Paul Hastings. Risk management should focus on long-term performance, he says. “But the new rules mandate that bonuses be taken out of profits, and that’s going to warp behavior.” And despite all the derision, compensation limits can sap talent from the institutions that need it most. “People will have other opportunities,” Poerio believes. “Star players will leave.”