It's no big secret that major banks and financial companies failed to properly address risk in the years leading up to the 2008 financial crisis. A new study reminds us that in some corners of Wall Street, the individuals and organizations responsible still haven't learned essential lessons.
Incensed over insane incentives
Deloitte Touche Tohmatsu revealed that a pathetic 37% of financial firms surveyed had made significant moves to address risk management in their compensation schemes. After surveying chief risk officers at 131 financial concerns both here and abroad, Deloitte crunched data from a variety of areas, including each company's use of common-sense factors to decrease the likelihood of high-risk, damaging behavior -- factors such as pay caps, clawback provisions, and deferred payouts.
Lavish rewards in good times, no consequences in bad times -- clearly, executives' system of incentives has fallen wildly out of whack. Witness AIG
Granted, some companies have put some safety measures in place. Goldman Sachs
Still, many financial companies have kept on hiking executives' pay. Goldman Sachs' Lloyd Blankfein has made headlines for his pay hike; JPMorgan Chase's
The Deloitte study reminds us that the battle to make sure that incentives don't encourage excessive risk-taking (not to mention excessive stupidity) continues. And when businesses circle the drain, high-ranking executives' rewards must turn into reprimands.
Look out: You're being watched
I'm not exactly thrilled that fewer than half of financial firms have adequately addressed risk management. However, shareholders are clearly tuned in to the problems with senior executive pay -- a heartening development.
This week, corporate governance watchdog RiskMetrics revealed that so far this year, shareholders at 44 companies have supported annual say-on-pay advisory votes by a 2-to-1 margin. The average support for annual voting has reached 62.8%, pretty much a landslide victory for the concept of more frequent shareholder input.
It may be difficult to change the status quo on compensation. Lucrative financial rewards for mediocre or even terrible performance have become force of habit in corporate America over the last several decades. Still, shareholders' greater say in the matter should now force many companies to reexamine that absurd, economically untenable habit.
As for Wall Street and its particularly egregious attitudes on compensation, look out: Shareholders aren't the only ones keeping a lookout. Everyone's got their eye on you.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.
