{"id":1660,"date":"2009-07-29T07:32:57","date_gmt":"2009-07-29T15:32:57","guid":{"rendered":"http:\/\/hodakvalue.com\/blog\/?p=1660"},"modified":"2009-07-29T07:57:49","modified_gmt":"2009-07-29T15:57:49","slug":"excessive-risk","status":"publish","type":"post","link":"http:\/\/hodakvalue.com\/blog\/excessive-risk\/","title":{"rendered":"Practical definition:  Excessive risk"},"content":{"rendered":"<p>Congress is trying the belt and suspenders approach to keep the market from having another meltdown as we experienced last year.\u00a0 The belt is <a href=\"http:\/\/www.finreg21.com\/blogs\/financial-regulator-chief\">tighter controls<\/a> at TBTF firms.\u00a0 The suspenders are the <a href=\"http:\/\/online.wsj.com\/article\/SB124881326412587827.html\">elimination of perverse incentives<\/a>.<\/p>\n<p>The thing is, if you want to eliminate perverse incentives, you have to know what they look like.\u00a0 According to an Equilar survey, here are some of the questions that companies are considering as they <a href=\"http:\/\/www.equilar.com\/Executive_Compensation_Custom_Research.php?pmc=Jul09CIN&amp;email=mhodak%40hodakvalue.com\">examine issues of excessive risk<\/a>:<\/p>\n<ul>\n<li>Are we over using stock options?<\/li>\n<li>Do our incentive plans promote short-term thinking?<\/li>\n<li>Do we have the right mix between short and long-term goals?<\/li>\n<li>Do large maximum bonus opportunities promote risk taking?<\/li>\n<li>Are we using overly aggressive performance goals?<\/li>\n<li>Do our bonus plans focus on too narrow a set of goals?<\/li>\n<li>Do we have the right mix between fixed and variable compensation?<\/li>\n<\/ul>\n<p>Six of these questions are sensible.\u00a0 One sticks out as completely bizarre to an incentive expert:\u00a0 &#8220;Do large maximum bonus opportunities promote risk taking?&#8221;<\/p>\n<p>Of course they do.\u00a0 Is that supposed to be a bad thing?\u00a0 Entrepreneurs have <em>unlimited<\/em> bonus opportunities&#8211;<a href=\"http:\/\/www.solarnavigator.net\/automotive_directory\/car_images\/ford_model_t_henry.jpg\">thank<\/a> <a href=\"http:\/\/www.tech-no-phile.com\/blog\/uploads\/jobs-woz-apple.jpg\">goodness<\/a>.<\/p>\n<p>The question of a maximum bonus opportunity is simply the wrong question when talking about reward systems.\u00a0 The question they should be asking is whether steep bonus opportunities are combined with <em>zero<\/em> bonus opportunities.\u00a0 <a href=\"http:\/\/www.finreg21.com\/lombard-street\/the-radical-experiment-pay-regulation-under-tarp\">All the governance risk faced by a company is in the area where the participant would earn no bonuses unless they can get up into the green zone of bonus payouts with an all-or-nothing, double-down, longshot bet<\/a>.<\/p>\n<p>So, guess which of those questions most congressmen view as the most critical in determining &#8220;excessive compensation risk?&#8221;\u00a0 Yep, the risk that business executives <a href=\"http:\/\/www.house.gov\/financialservices\/ExecutiveCompensation.html\">might get paid too much<\/a>.<\/p>\n<p>Unfortunately, the reporting on the proposed regulation of compensation risk doesn&#8217;t even bother to define what &#8220;excessive risk&#8221; means <a href=\"http:\/\/online.wsj.com\/article\/SB124881326412587827.html#mod=rss_whats_news_us\">at<\/a> <a href=\"http:\/\/www.reuters.com\/article\/GCA-CreditCrisis\/idUSTRE56R63G20090728\">all<\/a>, instead focusing on the political considerations of supporting or opposing any bill that purports to &#8220;contain&#8221; the excesses.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Congress is trying the belt and suspenders approach to keep the market from having another meltdown as we experienced last year.\u00a0 The belt is tighter controls at TBTF firms.\u00a0 The suspenders are the elimination of perverse incentives. The thing is, if you want to eliminate perverse incentives, you have to know what they look like.\u00a0 [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5,19,25],"tags":[],"class_list":["post-1660","post","type-post","status-publish","format-standard","hentry","category-executive-compensation","category-practical-definitions","category-reporting-on-pay"],"_links":{"self":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/1660","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/comments?post=1660"}],"version-history":[{"count":7,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/1660\/revisions"}],"predecessor-version":[{"id":1663,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/1660\/revisions\/1663"}],"wp:attachment":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/media?parent=1660"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/categories?post=1660"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/tags?post=1660"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}