It seems we can’t pick up a newspaper today without seeing another story on top management compensation, and its role in the near financial system meltdown. As Congress and the Administration wrestle with regulatory reform, fingers continue to point at CEOs and other senior executives who reaped huge rewards for taking what are deemed to be outsized risks – risks that brought some of their companies, and indeed the financial system, to the brink of disaster. The SEC’s new disclosure rules will shed more of a spotlight on executive pay and how companies and boards deal with corporate risk, and anger over “outsized” pay is boiling over in the form of regulatory reform and additional proposed taxes on financial services industry participants.
Certainly executive compensation should recognize the degree of risk inherent in performance. No one wants to see a CEO “bet the ranch” in a “heads the CEO wins, and tails shareholders and the taxpayers lose” scenario. So, yes, getting risk-reward back in balance at the top management level makes eminent sense, and already is under way.
With that said, however, we shouldn’t fall into a trap of thinking that dealing with the compensation issues can by itself address corporate risk. Those of you with leadership roles in risk management, compliance, auditing, and related areas in your organizations know full well that dealing with risk at the CEO level will not by itself transform how risk is managed throughout the organization. One can argue that CEO compensation has played only a limited role in causing financial institutions to take on such massive risks in the first place. Chief executives already have solid motivation to ensure the companies they lead achieve long term success, and certainly simply keeping their prestigious and lucrative job and reputation in tact are strong motivators. CEOs I’ve dealt with put the success of the company at the same if not higher level than acquiring personal more riches. Make no mistake, many do want to enhance their wealth, and some continue to keep score with peers, but putting their own personal objectives ahead of the company’s and its shareholders is not typical.
So, I hope and trust that neither the powers inside the Beltway nor corporate leaders and boards will think risk management is primarily about managing CEO’s motivations. The focus needs to be on risk management processes throughout the organization, linking risks with corporate objectives and initiatives, and managing risk to best achieve corporate goals.