“The financial crisis of 2008 occurred in part because of excessive risk taking by financial institutions. Compensation formulas at some of these institutions contributed to the collapse by encouraging the maximization of short-term revenues. Excessive risk, however, was not the only problem associated with compensation that surfaced during the crisis. Payments often seemed unrelated to actual performance. Compensation formulas could result in amounts disproportionate to the services provided and could include lavish perks. The practices raised broad concerns about the role of the board of directors in the corporate governance process. The source of the problem was—and remains—surprisingly clear. Compensation has traditionally been a matter left to the discretion of the board of directors. Directors in turn have a fiduciary obligation to act in the best interests of shareholders. In the abstract, the duties would seem sufficient to require boards to develop formulas that avoided excessive risk and linked incentives to the long-term performance of the company. In fact, fiduciary obligations impose no meaningful restraints on the type or amount of executive compensation authorized by boards. Instead, executive compensation is left to the “market” to regulate. Yet as the recent downturn shows, the market has not proved up to the task. Congress in the new millennium has expressed dissatisfaction with the compensation process and has intervened on several occasions. The Sarbanes-Oxley Act required top officers to reimburse improperly paid compensation in certain circumstances. The legislation also sought to prevent abuses in the compensation process by prohibiting loans to directors and executive officers. During the financial crisis, temporary restraints were imposed on the compensation practices of financial institutions receiving funds under the Troubled Asset Relief Program (TARP) of 2008. Permanent reforms, however, had to wait until the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. It authorized financial regulators to prohibit compensation practices that encouraged inappropriate risk taking. In addition, Congress sought to force corporate boards to adopt more rigorous processes for determining compensation and to give shareholders a permanent role in compensation determinations. These efforts, although productive, represented a patchwork of changes that left the underlying problems in place. Even under proposed rules by bank regulators, boards largely remained free of meaningful limits in determining compensation. As a result, for years after the adoption of the Dodd-Frank Act, the dynamics that contributed to the financial crisis remained mostly unchanged. Future reforms are therefore necessary and will likely emanate from Congress.”