Bank executives' comp played part in meltdown, says bank group

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http://financialweek.com/apps/pbcs.dll/article?AID=/20080717/REG/802367859/1036

The head of an international group of bankers said today that executive compensation at financial institutions was partly to blame for the credit crisis—and that pay packages need to be based on risk-adjusted performance and shareholder interests.

Speaking at the National Press Club, Josef Ackermann, who chairs both the Institute of International Finance and the board of Deutsche Bank, said banks’ executive compensation policies should be sustainable and should include clear benchmarking that takes into account shareholder performance.

“Compensation incentives should not induce risk-taking in excess of a firm’s appetite,” Mr. Ackermann said.

An IIF report on proposed bank best practices released today said a sizable portion of the pay of bank executives should be made up of deferred or equity-related components. The report also suggested that boards include risk adjustments in profit and loss statements when setting executive compensation.

Some shareholder groups have argued that compensation packages led banking executives to ignore highly risky securitization practices. One example: short-term bonuses for bank employees tied to the origination of subprime loans that were packaged into complex securities.