“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.” Even Wall Streeters concede they were dazzled by the money. To earn bigger bonuses, many traders ignored or played down the risks they took until their bonuses were paid. Their bosses often turned a blind eye because it was in their interest as well. “That’s a call that senior management or risk management should question, but of course their pay was tied to it too,” said Brian Lin, a former mortgage trader at Merrill Lynch.
To be effective, risk management must have the authority and the independence to adjust incentive programs based on the risk appetite of the organization. If risk managers are participating in the very incentive programs that they are charged with overseeing, then a blind-eye will always be turned toward excessive risk-taking.
