Columbia International Affairs Online: Working Papers

CIAO DATE: 04/2010

Regulation of Executive Compensation in Financial Services

February 2010

Council on Foreign Relations


Many people argue that inappropriate compensation policies in financial companies contributed to the World Financial Crisis. Some say the overall level of pay was too high. Others criticize the structure of pay, claiming that contracts for CEOs, traders, and other key professionals induced them to pursue excessively risky and short-term strategies. In this paper, we first argue that governments should generally not regulate the level of executive compensation in financial institutions.1 We have seen no convincing evidence that high levels of compensation in financial companies are inherently risky for the companies themselves or the overall economy. Moreover, limits on pay are likely to cause unintended consequences. As a result, society is better off if compensation levels are set by market forces.