Opinion: The problem with performance-based compensation

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Published in Financial Week December 7, 2008 by Gregg D. Polsky

A major cause of the current economic crisis was the simple failure of financial institutions to adequately price risk. Former Federal Reserve chairman Alan Greenspan recently testified that he was “in a state of shocked disbelief” that the “self-interest of lending institutions” failed so markedly to protect shareholders. One question is whether a provision of the tax code that encourages companies to use significant amounts of performance-based compensation may have contributed to the current dire situation.

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