Reassessing Risk

But there is also reason to be skeptical. Take, for instance, the idea of risk-adjusted employee pay as a way to keep people, including rank-and-file traders, from following personal incentives to the exclusion of a company's broader interest. It is a compelling idea. But so far it hasn't happened.

The most high-profile attempt has been the Treasury Department's requirement that banks participating in its recapitalization program make sure senior executives' pay doesn't entice them to take "unnecessary and excessive risks that threaten the value of the financial institution." What exactly that means, though, has been lobbed back to directors. And technically they've always had a duty to step in the way of anything that threatened their company's value. In fact, companies long ago thought they had figured out a way to shepherd individual interest. "Everyone thought risk-based compensation was equity in the firm," says James Wiener, head of the finance and risk practice at the consultancy Oliver Wyman. Employees at Lehman Brothers and Bear Stearns owned some 30% of their companies. At the end of the day, that didn't matter. Because altering a foundational element of an industry is difficult.

And maybe right now we shouldn't be trying quite so hard. With lending locked up the world round, we desperately need some risk-taking. We just don't have to risk everything.