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US unveils new norms for CEO pay practices

Source: PTI
June 22, 2010 18:20 IST
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DollarsTo curb excessive risk taking ways on the Wall Street, American regulators have issued new guidelines on executive compensation practices.

Skewed pay packets that encouraged imprudent risk-taking approach was one of the main causes for the financial crisis of 2008-09.

Moreover, public outrage against high executive salaries had even forced companies to slash compensation.

The Federal Reserve said the guidelines are to ensure that incentives at banking and other financial entities are linked to longer-term performance and do not result in undue risks to the financial system.

"The guidance applies not only to top-level managers, but also to other employees who have the ability to materially affect risk profile of an organisation, either individually or as part of a group," Fed said on Monday.

The guidelines, which would be enforced by the Fed, is supported by the office of the comptroller of the currency, the office of thrift supervision, and Federal Deposit Insurance Corporation.

According to the Fed, flawed compensation practices in the financial industry were one of many factors that led to the financial crisis.

"Banking organisations too often rewarded employees for increasing the organisation's revenue or short-term profit without adequate recognition of the risks," it added.

Going by the latest guidelines, financial companies should have proper risk management strategies and a strong governance structure in addition to the system where the pay for senior executives are approved by the board of directors.

Fed governor Daniel K Tarullo said many large banking organisations have already implemented some changes in their compensation policies but more work clearly needs to be done.

Noting that banking organisations should ensure that incentives do not encourage 'imprudent risk-taking behaviour', the statement said regulators would closely monitor activities related to this issue.

"Where appropriate, the (regulatory) agencies will take supervisory or enforcement action," it added.

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