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.”

The Securities & Exchange Commission is wading into the compensation waters, too. The agency recently rejected an attempt by Regions Financial to block a shareholder proposal by the Sheet Metal Workers’ National Pension Fund that could stricter compensation caps on executive compensation than those imposed under the stimulus bill. The restrictions include a limit on bonuses to “an amount no greater than one times the executive’s annual salary,” and a requirement that “senior executives hold for the full term of their employment at least 75 percent of the shares of stock obtained through equity awards.”

SEC staffers sided with the pension fund. It is “too early to tell whether this represents a policy trend,” says Jane Storero, partner in the public companies group at law firm Bank Rome. “The pension fund had a very compelling case. But the SEC’s been criticized on a host of things. I think that’s where we’re going on [shareholder] say-on-pay.”

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