Executives taking the Hong Kong University of Science and Technology's MSc in global finance (MSGF) programme expect to study the mechanisms and markets that make the business world revolve. Importantly, the programme also gives them a fuller appreciation of what anyone aspiring to a boardroom role must also see - the interconnections and implications for the wider community of actions and decisions. Since the financial crisis that hit the global economy in 2008, that means examining certain long-held fundamentals and, for example, reappraising ways in which major institutions should manage risk and reward individuals. 'Bankers' pay has been a huge focal point for voter and investor-rage, and it has received a lot of attention from the public and regulators,' says Jennifer Carpenter, associate professor of finance at New York University Stern School of Business, who was in Hong Kong last month to teach an MSGF course. 'Because of that, people are calling for caps on pay or clawbacks. There is talk of changing the nature of contracts, punitive taxation on bonuses, or withholding bonuses.' Carpenter notes that the United States Federal Reserve has put out some guidelines in this area. In her opinion, though, regulators and taxpayers should not concern themselves too much with the levels of compensation paid to bankers and other top finance executives. That basically comes out of the pocket of shareholders. Instead, attention should centre on how risk-related incentives operate. As events have shown, what matters most to taxpayers and regulators is if taking risks will lead to a bailout and who then carries the can. 'Ideas about caps or levels of compensation miss the point,' says Carpenter, whose main areas of research include executive stock options, risk incentives and fund manager remuneration. 'The question for regulators is to come up with a compensation formula that doesn't give incentives to take great risks. But the principal problem is the incentive for the shareholders themselves - if a bank takes more risk, there is potentially more profit.' The way forward, Carpenter suggests, is to address the balance sheets of banks and other organisations subject to similar pressures. This can be done with regulations requiring more risk-sensitive deposit premiums. The greater the assumed level of risk for certain types of transaction, the higher the premiums, which would act as a form of debt guarantee. Such moves would increase expenditure and bring down the share price for certain organisations, but so be it. 'What you want to do is tax risk,' says Carpenter, who worked in the fixed-income division of Goldman Sachs before joining Stern in 1995. 'If you charge equity holders for the risk companies take, they will sort out the details and pass it on. As long as shareholders are aligned with taxpayers on the broader issues, they can negotiate with managers who then may - or may not - feel the hit in their compensation.' Shareholders and directors can still be left to decide the terms and conditions of employment contracts. They must, though, contribute towards the implicit guarantee from taxpayers through a deposit insurance premium. Doing things that way also allows regulators to focus on devising and supervising rules for hundreds of institutions, rather than trying to get to grips with the compensation deals of perhaps hundreds of thousands of individuals. 'It is better for regulators to go to the heart of the problem and fix it by charging banks for the risk they impose on the system,' Carpenter says. 'They can go straight to the profit function and charge banks for things that will go bad when the rest of the economy goes bad. It is much more complicated to decide what skills and compensation are appropriate for a specific job. The shareholders are able to do that. I wouldn't want a roomful of regulators trying to figure it out.' To emphasise the point, she notes that employers can usually find a way around any rules that target pay. Regulations that limit cash bonuses simply create alternatives. And payments that use stock options or are deferred over longer periods don't necessarily change ingrained practices and attitudes to risk. 'I don't think that is the right direction,' Carpenter says. 'You have to look at the activities of the bank as a whole and variants of how much they could lose if the market went down for everyone. Risks that correlate with others and require public assistance are the ones that matter most for society. The independent bankruptcies you can just let go.' Regarding the actual sums paid to some senior executives before and since the crisis, Carpenter has no particular qualms. The arguments for and against are well worn, but her general view is that large institutions have to pay the going rate for executives with the skills and experience to make the biggest decisions. Research shows that as firms scale up, the value of jobs at the top increases more than the jobs at the bottom. 'A chief executive can make decisions worth US$100 million and the talent to get that right is very important in a competitive market,' Carpenter says.