4 pages. Excerpt: Moral hazard is an awkward phrase that means, when a party is insulated from risk, it may behave differently than if it were fully exposed to that risk. The concept has definite applicability to executive compensation. If an executive team is rewarded for the positive outcomes of good investments, but insulated from the negative consequences of investments that turn sour, then we may encourage excessive risk-taking. It is thought that moral hazard has been a major contributing factor to the current financial crisis gripping Wall Street. It is directly addressed by the recent legislation enacted by Congress that grants the Treasury Department power to purchase distressed assets from banks and other financial firms. Specifically, the Act prohibits participating companies from providing compensation incentives to senior executive officers 'to take unnecessary and excessive risks that threaten the value of the financial institution.'  MORE >>