In the wake of the global financial crisis, attention has often focused on whether incentives generated by bank executives? compensation programs led to excessive risk-taking.
Post-crisis, compensation reform proposals have taken broadly three approaches: long-term deferred equity incentive compensation, mandatory bonus clawbacks upon accounting restatements and financial losses, and debt-based compensation. In earlier articles we recommended the following compensation
structure for bank executives: incentive compensation should consist only of restricted stock and restricted stock options ? restricted in the sense that the executive cannot sell the shares or exercise the options for two to four years after his or her last day in office. We contend that this incentive compensation package, which we term the Restricted Equity proposal, will focus bank managers? attention on the long-run and discourage them from investing in high-risk, value-destroying
projects. Equity based incentive programs such as our proposal may lose effectiveness in motivating managers to enhance shareholder value as a bank?s equity value approaches zero. As a consequence, some commentators have called for pay packages linked to bank debt. We contend, however, that the more appropriate approach is to retain equity-based incentive pay and to reform bank capital structure to reduce the probability of a tail event, and hence insolvency.
We advance two approaches, not necessarily exclusive, that coupled with the Restricted Equity proposal, we maintain, would incentivize bank executives to not take on projects of excessive risk: meaningful higher and simpler capital requirements and mandatory issuance of contingent convertible capital ? debt that converts to equity under specified adverse states of the world. Because the optimal capital level is unknown, we further advocate facilitating regulatory diversity within the international financial regulatory regime, to generate information concerning what level and form of capital works best, which would improve the quality of decision-making and the resiliency of the global financial system.
The stylized fact that grounds much of the recent literature on common ownership is the parallel increase in the profitability of oligopolistic industries and common ownership. Some have argued that the growth in common ownership has caused the...Read more
We exploit the UK Bribery Act of 2010 to test whether the pricing of audit changes with the level of corruption/bribery in the firm’s business environment. Adopting a triple difference design, we show that affected firms operating in countries...Read more
Fintech firms, once seen as “disruptors” of the traditional banking world, are now increasingly seen as attractive partners for established financial institutions. Such partnership agreements come in different forms and contexts, but most share...Read more
A 1970 New York Times essay on corporate social responsibility by Milton Friedman is often said to have launched a shareholder-focused reorientation of managerial priorities in America’s public companies. The essay correspondingly is a primary...Read more