I believe that corrective action - taken voluntarily - is not only overdue but also morally sound. This evening, I would like to focus on the effects of public policy on executive compensation. As you know, in 1993, the IRS ruled that the maximum tax-deductible salary a company can pay an employee is $ million per year. Compensation above $ million has to be “performance-related” to be considered a tax-deductible expense. This change in public policy gave firms that wanted to minimize taxes the incentive to introduce performance-related pay structures for executives earning above $ million a year. The policy change is a key reason that stock options have become the most prevalent performance-related structure for executive compensation. Option-based executive compensation raises a number of issues. For example, one feature of the 1993 IRS ruling is that the $ million salary cap for tax deductibility is nominal and not indexed. This means that as the average total compensation for executives rises over time, the incentive to use stock options increases. Another issue stems from the fact that stock options are non-transferable. Therefore, an increasingly large fraction of an executive's compensation in the form of stock options represents a non-diversified risk. Moreover, if the firm goes bankrupt, the options become worthless at the same time that the executive’s job is lost. As a result, firms may have to increase the amount of options they offer an executive to offset the increased riskiness of this form of compensation.
On its  2  BIS central bankers’ speeches  own, however, such a policy will raise difficult political questions about the capacity of the weaker sovereigns to pay for any recapitalisation of their banks. Bank and sovereign solvency concerns are inextricably intertwined. In the end, the underlying solvency concerns require countries to adopt compatible policies so that they can credibly service their internal and external debts. What does this mean for our own economy? Our objective must be to steer the UK economy slowly back to a position of more normal interest rates and lower budget deficits. With a lower level of sterling and a credible plan to reduce the fiscal deficit over the medium term, we were on track. But the problems in the euro area and the marked slowing in the world economy have lengthened the period over which a return to normality is likely. 2011 has been the year of the reluctant recovery. Growth has disappointed, both here and abroad. Business and consumer confidence have fallen sharply, not only at home but also elsewhere in Europe and the United States. And the level of world trade in goods has stagnated. A slowing of the world economy, especially in the euro area, is a threat to our strategy of rebalancing and recovery of the UK economy. Despite the more competitive level of sterling, the recovery in our trade position is at risk of stalling.