Misaligned Incentives and the Economic Crisis

Compensation problems have been highlighted in much of the coverage of the financial crisis, including a number of reports from the Institution of International Finance. (See, for example, Report of the IIF Committee on the Market Best Practices: Principles of Conduct & Best Practice Recommendations, Financial Services Industry Response to the Market Turmoil of 2007-2008.) These reports have made some sensible recommendations relating to executive compensation practices, mostly aimed at aligning compensation incentives with risk-adjusted performance and providing for recourse when the rewarded performance later results in undesirable outcomes.

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