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Why Financial Pay Shouldn’t be Left to the Market

Although some financial firms are reforming how – and how much – they pay their employees, governments around the world are seriously considering regulating such firms’ compensation structures, spurring loud protests from financial bosses. But, as the recent financial crisis showed, such regulation is both justified and necessary.

CAMBRIDGE – Although some financial firms are reforming how they pay their employees, governments around the world are seriously considering regulating such firms’ compensation structures. The Basel Committee on Banking Supervision has recently come out in favor of such regulations, and the United States House of Representatives has voted to require regulators to set compensation rules.

Perhaps not surprisingly, many financial bosses are up in arms over such moves. They claim that they need the freedom to set compensation packages in order to keep their most talented people – the ones who will revive the world’s financial system. So, should governments step back and let financial firms reform themselves?

The answer is clearly no. In the post-crisis financial order, governments must take on the role of monitoring and regulating pay in financial firms; otherwise, the perverse incentives that contributed to the current crisis could easily recur.

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