Boards of directors are used to taking flack for executive compensation practices, but this time it is serious. Spurred on by angry taxpayers, the government will be pressuring boards of directors of financial companies to see that their compensation practices do not incent inappropriate risk taking that could lead to taxpayer losses. But how can a board do that if the company does not have a defensible framework for assessing and managing its enterprise risks? How can directors estimate the effect that different compensation policies will have on their company’s risk if they don’t know how much risk the company is taking or where it comes from? The urgent need to defend compensation practices may finally prod managements and boards to do what they should have been doing all along – building effective enterprise risk management capabilities.
Grumblings about excessive executive pay have a long history but petulant investors armed with peashooters have now been reinforced by government officials bearing automatic weapons. Boards are in the cross hairs because it is their direct responsibility to set executive pay and the public is outraged that some people collected huge payouts for blowing up companies that required government bailouts. (Of course, the government itself played a leading role in creating the crisis, but that is another story.)
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