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Regulation of Executive Compensation in Financial Services

A Squam Lake Working Group Paper

Author: Squam Lake Working Group on Financial Regulation

Regulation of Executive Compensation in  Financial Services - regulation-of-executive-compensation-in-financial-services

Publisher Council on Foreign Relations Press

Release Date February 2010

6 pages

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Overview

Many people argue that inappropriate compensation policies in financial companies contributed to the global financial crisis. Some say the overall level of pay was too high. Others criticize the structure of pay, claiming that contracts for CEOs, traders, and other professionals induced them to pursue excessively risky and short-term strategies. This Working Paper, the eighth in the Squam Lake Working Group series distributed by the Center for Geoeconomic Studies, argues that governments should generally not regulate the level of executive compensation at financial firms. Instead, a fraction of compensation should be held back for several years to reduce employees’ incentives to take excessive risk.

More About This Publication

The Squam Lake Working Group on Financial Regulation is a nonpartisan, nonaffiliated group of fifteen academics who have come together to offer guidance on the reform of financial regulation.

The group first convened in fall 2008, amid the deepening capital markets crisis. Although informed by this crisis—its events and the ongoing policy responses—the group is intentionally focused on longer-term issues. It aspires to help guide reform of capital markets—their structure, function, and regulation. This guidance is based on the group's collective academic, private sector, and public policy experience.

To achieve its goal, the Squam Lake Working Group is developing a set of principles and their implications that are aimed at different parts of the financial system: at individual firms, at financial firms collectively, and at the linkages that connect financial firms to the broader economy.

The members of the group are

Martin N. Baily
Brookings Institution

Andrew B. Bernard
Dartmouth College

John Y. Campbell
Harvard University

John H. Cochrane
University of Chicago

Douglas W. Diamond
University of Chicago

Darrell Duffie
Stanford University

Kenneth R. French
Dartmouth College

Anil K Kashyap
University of Chicago

Frederic S. Mishkin
Columbia University

Raghuram G. Rajan
University of Chicago

David S. Scharfstein*
Harvard University

Robert J. Shiller
Yale University

Hyun Song Shin†
Princeton University

Matthew J. Slaughter
Dartmouth College

Jeremy C. Stein
Harvard University

René M. Stulz
Ohio State University

*David Scharfstein withdrew from the group when he accepted a position at the Treasury Department in September 2009.

†Hyun Song Shin withdrew from the group in January 2010 to serve as chief adviser on international economics to South Korean president Lee Myung-bak.

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