Thoughts on How to Fix Bank Exec Compensation

Senior bank regulators are considering new regulations on bank executive pay. Bank regulators and boards should consider three criteria to evaluate bank executive compensation reform policies: simplicity, transparency, and a focus on creating and sustaining long-term shareholder value. As shareholders are now required to vote on CEO compensation packages, a simple incentive structure is easier for them to understand and evaluate, reducing the need to rely on third-party vendors of proxy voting advice, the value of which has been the subject of considerable controversy. Second, simplicity and transparency in incentive compensation packages mitigate public skepticism toward high levels of executive pay in conjunction with poor performance. Third, there is no empirical evidence that complexity of CEO pay is positively related to future accounting or share-price performance. Instead, complexity has led to increased earnings manipulation by managers. Finally, focusing on creating and sustaining long-term shareholder value would channel management's attention to the longer term profitability. Business and legal scholars posit that managers should act in the best interest of long-term shareholders. What better way to do this than tie management incentive compensation to long-term share price?