Incentive Compensation as a Risk Factor
footnoted.org has a post highlighting a Risk Factor from the 10Q of Anworth, a company that invests in agency backed mortgage securities. Here’s how it reads
In the risk factors section of its first quarter 10-Q filed Friday, Anworth gives this warning: “In an effort to earn greater amounts of incentive compensation under their Employment Agreement[s], as our executive officers evaluate different mortgage-related assets for our investment, there is a risk that they will cause us to assume more risk than is prudent.” (Anworth has included a version of this disclosure in its filings for the past couple of years, but the latest Q throws in some new language about the structure of a certain bonus pool.)
Now its all great that Anworth is making full disclosure on what it thinks are truly its risk factors. But really, calling compensation policy a risk factor is like saying “Our management practices are deficient. And now you’ve been warned.” This begs the question - why don’t they fix the incentive compensation?
On the other hand, one can rightfully ask, why aren’t other companies giving “uncontrollable executive greed” as a risk factor? Its not like everyone else but Anworth has found the answer. The problem is far too deep set. It is a difficult problem to solve. I have written about this before as well here and here.
One of the topmost problems that the Capital Markets will have to solve as it digs itself out of the hole it is in is executive compensation. Disclosing it as a risk factor isn’t enough.
