Both President Obama and Treasury Secretary Tim Geithner have put some of the blame for the collapse of the economy on the structure of financial institutions' compensation plans. This legitimate criticism also extends to the reward systems of the mortgage industry. In both industries, production (and short-term profits) were excessively rewarded without sufficient regard to the quality or sustainability of loans. In the overheated housing market of the early part of this decade, getting loans processed and selling off the loan "asset" was paramount, and requirements like income or employment verification went out the window. One would think that the bitter experience that followed for mortgage brokers and bankers (not to mention homeowners) would be sufficient impetus for the surviving companies to amend the focus of compensation plans that reward suboptimal behavior. It certainly should be on the minds of every board member responsible for compensation oversight.

But the federal government does not believe the capitalist system is capable of correcting its errors without the guidance and prodding of laws and regulations. Perhaps they're right about that. In any case, since taxpayers are clearly on the hook when risky behavior leads to massive losing bets on the direction of housing prices, it's in our best interests to ensure that the mistakes of the past are not repeated. New Federal Reserve Bank rules are being discussed that will curb bank's ability to pay employees in a way that threatens the safety and soundness of the bank. The SEC is looking at similar rules, although what companies they would apply to are not clear at this juncture. Not to be outdone, Congress is considering legislation to achieve the same goals. It's entirely possible that we'll end up with a legislative and regulatory soup that will take years to interpret and unravel. Historically, attempts by Congress to limit executive pay have backfired. This effort is a bit different in that it does not focus on the amount of money paid, but instead looks at regulating the goals set. As any compensation professional can attest, this is a much trickier proposition. While the goal is laudable (and arguably necessary), it will take a lot of thought and advice from fully informed and sophisticated players for these type of regulations to succeed. Based on the track record of those in charge in Congress, the SEC and the Fed, it's hard to be optimistic about the outcome. We may well avoid the mistakes of the past. It's the new mistakes we haven't made yet that I'm worried about.

Please send comments/responses to Jay Edelman