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In: Accounting

How dodd frank act curb excessive executive compensation?

How dodd frank act curb excessive executive compensation?

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Expert Solution

The Dodd-Frank law mandated the SEC to adopt the rule that directs stock exchanges to prohibit companies from listing their shares if they do not create and disclose a policy for clawbacks of excess incentive-based compensation for all current or former executive officers after financial statements are restated for any .

In the wake of the financial crisis and the bail outs of many financial institutions, the American people became outraged at the very high salaries and bonuses being paid to financial executives and traders. It is understandable that taxpayers do not want government funds be used to pay such bonuses to executives who have contributed to the failure of their companies and the need for taxpayer funds, and Congress and the President responded to the situation by putting in place compensation restrictions administered by a special master.

While the Dodd-Frank Act made important steps forward in improving financial regulation a lot remains to be done during implementation. This is understandable, because the House and Senate are not the right place for detailed rule making and, of course, some important issues, such as capital and liquidity requirements, have to be worked out internationally to ensure a level playing field for US financial institutions. The Basel process has not been either timely or effective in past years, but there are indications now that it is moving more quickly and constructively to develop harmonized standards.

The financial crisis is not over yet; its effects still linger and the recession that it caused is very much still with us, but the subject of this hearing is welcome: to review the supervision of compensation structures within financial institutions. There were many causes of the crisis but one of the contributory factors was that traders and CEOs were often rewarded on the basis of short term profits, encouraging them to take excessive risks that paid off handsomely in the short run but that caused large losses over a longer period. One element of a more stable financial system involves compensation structures for those in financial institutions that do not incent excessive risk taking.


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