Let the Good Times Roll Again?

With Goldman Sachs and other big banks once again reporting huge profits, Wall Street and the City of London are awash with rumors that salaries and bonuses this year will match their level before the financial crisis hit. But banks' return to profitability must not be allowed to disguise the need -exposed by the crisis - to reform financial executives' pay arrangements.

CAMBRIDGE – Goldman Sachs announced this month plans to provide bonuses at record levels, and there are widespread expectations that bonuses and pay in many other firms will rise substantially this year. Should the good times start rolling again so soon?

Not without reform. Indeed, one key lesson of the financial crisis is that an overhaul of executive compensation must be high on the policy agenda.

Indeed, pay arrangements were a major contributing factor to the excessive risk-taking by financial institutions that helped bring about the financial crisis. By rewarding executives for risky behavior, and by insulating them from some of the adverse consequences of that behavior, pay arrangements for financial-sector bosses produced perverse incentives, encouraging them to gamble.