 |
|
|
|
 | |||
 |
Program on Corporate Governance
The Program on Corporate Governance is pleased to announce the issuance or publication of three studies on executive pay and risk-taking:
Paying for Long-Term Performance
The Program?s research project on executive pay and risk-taking was supported by the IRRC Institute. Below are abstracts of these three studies and links to them (as well as information about the SSRN journal on Executive and Director Compensation and the HLS Forum).
Paying for Long-Term Performance
Abstract:
Abstract:
We find that the top-five executive teams of these firms cashed out large amounts of performance-based compensation during the 2000-2008 period. During this period, they were able to cash out large amounts of bonus compensation that was not clawed back when the firms collapsed, as well as to pocket large amounts from selling shares. Overall, we estimate that the top executive teams of Bear Stearns and Lehman Brothers derived cash flows of about $1.4 billion and $1 billion respectively from cash bonuses and equity sales during 2000-2008. These cash flows substantially exceeded the value of the executives? initial holdings in the beginning of the period, and the executives? net payoffs for the period were thus decidedly positive. We discuss the implications of our analysis for understanding the possible role that pay arrangements have played in the run-up to the financial crisis and how they should be reformed going forward.
Regulating Bankers' Pay
This paper seeks to make three contributions to understanding how banks? executive pay has produced incentives for excessive risk-taking and how such pay should be reformed. First, although there is now wide recognition that pay packages focused excessively on short-term results, we analyze a separate and critical distortion that has received little attention. Equity-based awards, coupled with the capital structure of banks, tie executives? compensation to a highly levered bet on the value of banks? assets. Because bank executives expect to share in any gains that might flow to common shareholders, but are insulated from losses that the realization of risks could impose on preferred shareholders, bondholders, depositors, and taxpayers, executives have incentives to give insufficient weight to the downside of risky strategies.
Second, we show that corporate governance reforms aimed at aligning the design of executive pay arrangements with the interests of banks? common shareholders ? such as advisory shareholder votes on compensation arrangements, use of restricted stock awards, and increased director oversight and independence ? cannot eliminate the identified problem. While such measures could eliminate risk-taking that is excessive even from shareholders? point of view, they cannot be expected to prevent risk-taking that serves shareholders but is socially excessive.
Third, we develop a case for using regulation of banks? executive pay as an important element of financial regulation. We provide a normative foundation for such pay regulation, analyze how regulators should monitor and regulate bankers? pay, and show how pay regulation can complement and reinforce the traditional forms of financial regulation.
The New E-journal on Compensation of Executives and Directors:
On this occasion, the Program would also like to draw readers' attention to the new e-journal on Compensation of Executives and Directors of SSRN's Corporate Governance Network (CGN). This journal, which is sponsored by the IRRC institute and edited by members of the Program, contains recent working papers that deal with compensation of top executives, compensation of mid-level executives, director compensation, and similar topics.
The journal collects abstracts on these topics from all new submissions to the entire SSRN database irrespective of discipline. It brings together contributions from accounting, economics, finance, law, management, sociology and psychology. Thus, this e-journal provides its readers with a full exposure to all new papers related to its subject matter placed on SSRN.
To subscribe to the journal, click here. For an overview of CGN and its journals, please click here.
New on the HLS Forum on Corporate Governance and Financial Regulation:
Posts placed during the past ten days include:
Please visit the Harvard Law School Forum at:
Or sign up to get email announcements about new posts on the Forum at:
You are currently subscribed to the electronic mailing list of the Harvard Program on Corporate Governance. It is possible to subscribe (free of charge) to this electronic mailing list at our Subscription Web Page. To unsubscribe send an email to The Program on Corporate Governance with the following subject:"UNSUBSCRIBE CORPGOV - username_at_youremailserver" (where username_at_youremailserver is your full e-mail address).
|
||