the spirit of capitalism: the role of executive...
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"TheSpiritofCapitalism:TheRoleofExecutiveCompensationintheFinancialCrisis"
ThomasF.Cooley∗
NewYorkUniversity
TheMaxWeberLecture
October21,2009
Abstract
Wheneconomicdisastersoccuritiscommontolooktothemanagersoftheeconomyandquestionthedecisionstheymadeandtheincentivesthatdrovetheirdecisions.Inthefinancialcrisisof2007‐2009compensationwassingledoutasoneofthemostimportantanddeeplyflawedelementsoftheincentivesystemthatinducedfirmstoaccumulateenormousamountsofriskontheirbalancesheets.InClementi,Cooley,Richardson,andWalter(2009)wedescribemanyoftheflawedpracticesinfinancialfirms.But,executivecompensationmorebroadlyhaslongbeenasensitiveissueandfinancialcriseshaveatendencytofocusincreasedattentiononit.Inthepasttwodecadestherehasbeenmuchdiscussionofexecutivecompensation,manypublicexamplesoflavishpay,butnorealconsensusontheextentoftheproblemifindeedthereisone.Inpart,thisisbecausethereisalackofclarityaboutwhatthefactsare.InthislectureIdescriberecentresearchonexecutivecompensationintheUnitedStatesintheperiod1993–2006lookingatboththecross‐sectionalandtimeseriesvariation.MostimportantlyIdescribetheextenttowhichcompensationpracticesachievethegoalofaligningtheinterestsofmanagersandshareholders.
∗I am grateful to my coauthor Gian-Luca Clementi with whom I have worked on the issues of executive compensation both theoretically and empirically for several years. Also thanks to Matt Richardson and Ingo Walter for deep discussions on these issues. I am most grateful to Ramon Marimon and to the Max Weber fellows of the EUI for lively discussion and to Susan Garvin for her kind support and patience.
I.Introduction
Itisagreatpleasuretojointhedistinguishedlistofpeoplewhohavedeliveredtheselecturesandtobeapartofthisprogramnamedforoneofthegreatsocialscientistsofthenineteenth/twentiethoranycentury.Iincludedinthetitleofmytalk“TheSpiritofCapitalism”becauseWeber’simportantbookTheProtestantEthicandTheSpiritofCapitalismhadsomeimportantinsightsonthemotivesforwork.
WeberwrotethatcapitalisminnorthernEuropeevolvedwhentheProtestant/Calvinistworkethicinfluencedlargeenoughnumbersofpeopletoengageinworkinthesecularworld,developingtheirownbusinessesandengagingintradeandwealthaccumulationinordertoinvest.
Inotherwords,theProtestantethicwasaforcebehindthesetofactivitiesthatinfluencedthedevelopmentofcapitalism.Thisideaisalsoknownas"theWeberthesis".WeberproposedtheProtestantEthicasmerelyoneinanumberof'electiveaffinities'thatwasinstrumentalinfosterthedevelopmentofcapitalism.
Weberhighlightedtheproblemthatindustrialistsfacewhenemployingpre‐capitalistlaborers:attemptsbyagriculturalentrepreneurstoencouragemorelaborinputbyofferinghigherwagesoftenfailedbecausehigherwagesendedupwithworkersspendinglesstimeworkingandhavingmoreleisureratherthanaffordingthemselvesmoreconsumption.WeberobservedthatthatsocietieshavingmoreProtestantsarethosethathaveamoredevelopedcapitalisteconomy.Hedefinedthespiritofcapitalismastheideasandespritthatfavorthepursuitofeconomicgain:"Weshall…usetheexpression'spiritofcapitalism'forthatattitudewhichstrivessystematicallyforprofitforitsownsake.”
MyguessisthatWeberwouldhaveseenthemoderncorporateworldandtheincentivestructuresthereinasaveryinterestingtopicforinquiry.Hemightevenhavefounditunderstandableifabitextreme.But,asideashavedevelopedintheworldofcorporatefinancewehavecometorealizethatincentivesarealotmorecomplicated–thatinthemoderncorporationasBerleandMeans(1932)describedit,thatownershipandcontrolaredivorcedfromoneanother,andthatweneedtoputsomeseriousthoughtintohowwegivemanagerstheincentivestodotherightthing.Wehavelongsincerecognizedthattherearebuiltinmarketfailuresorfrictionswhichoccurbecausewecannotperfectlymonitortheeffortsofmanagersandbecausemanagershaveshortertimehorizonsthanthefirmoritsatomisticowners.
ThepasttwodecadeshavewitnessedasharpincreaseinincomeinequalityintheU.S.,unlikeanythingwehaveseensincethe1920’s.ThatincreasewasfollowedbytheGlobalFinancialcrisisof2007‐2009.Itisnotatallsurprisingthat,insuchaclimate,executivecompensationhascomeunderincreasedscrutiny.Compensationhasbeensingledoutasoneofthemostimportantanddeeplyflawedelementsoftheincentivesystemthatinducedfirmstoaccumulateenormousamountsof
riskontheirbalancesheets.InClementi,Cooley,RichardsonandWalter(2009)wedescribemanyoftheflawedpracticeswithinfinancialfirms.Thereiscurrentlyenormouspoliticalpressuretodosomethingmorebroadlyaboutcompensationofexecutives.TheU.S.Treasury,theFederalReserve,theU.K.FinancialServicesAuthorityarealladvancingproposalstodosomethingaboutexecutivepayparticularlyinfirmsthathavereceivedgovernmentassistance.Executivecompensationmorebroadlyhaslongbeenasensitiveissueandfinancialcriseshaveatendencytofocusincreasedattentiononit.In1929forexamplemuchattentionwasfocusedonthecompensationofEugeneGrace,thepresidentofBethlehemSteel,whofacedahugeuproarwhenitwasrevealedthathereceivedabasesalaryof$12,000andabonusofmorethan$1.6million.Thatamountsto$150,000salaryin2009dollarswithanearly$20millionbonus.In1933Congressdemandedthateverycorporateincometaxreturnincludealistofsalariesfortopexecutives.Whenthoselistsweremadepublicthefollowingyear,therewasanoutcryinCongress."Forthecaptainsofindustrytobedrawingdownlargesalariesisunconscionableandunpatriotic,"declaredSen.BurtonWheeler,D‐Mont."Thepracticemustbecurbedbylegislation,throughtaxationandpublicity."
Sen.ThomasP.Gore,D‐Okla.,grandfatherofauthorGoreVidal,proposedlegislation(itdidn’tpass)thatsaid:
“Thereshallbelevied,collected,andpaidforeachtaxableyearupontheamountbywhichthecompensation(includingsalaries,commissions,emolumentsandrewardsandanyotherrewardorbonusbyanynameknown)ofanyindividualforpersonalservicesexceedscompensationattherateof$75,000peryear,ataxof80percentumofsuchamount.”
ThemostimportantcaseinthaterahoweverinvolvedGeorgeWashingtonHillthePresidentofAmericanTobaccoandhisotherseniorexecutives.InthatcaseseveralexecutivesofAmericanTobaccoCo.hadreceivedbonusesthatplaintiffsclaimedwereexcessive.Thebonuseshadbeenpaidunderaplanthatwasapprovedbyshareholdersintheformofaby‐lawadoptedin1912.Theby‐lawprovidedthatifthenetprofitsofAmericanTobaccoexceededabout$8.2millioninanyyear,thepresidentofthecompanywouldreceivepaymentof2.5percentofsuchexcess,andeachoffivevicepresidentswouldreceive1.5percent,anaggregateof10percentoftheannualnetprofitexceeding$8.2million.
InRogersv.Hill(1933),theU.S.SupremeCourtruledthatoverallcompensationmustbereasonableinproportiontothevalueoftheservicesrendered.“Whiletheamountsproducedbytheapplicationoftheprescribedpercentagesgiverisetonoinferenceofactualorconstructivefraud,thepaymentsundertheby‐lawhavebyreasonofincreaseofprofitsbecomesolargeastowarrantinvestigationinequityintheinterestofthecompany.Muchweightistobegiventotheactionofthestockholders,andtheby‐lawissupportedbythepresumptionofregularityandcontinuity.Buttheruleprescribedbyitcannot,againsttheprotestofashareholder,
beusedtojustifypaymentsofsumsassalariessolargeasinsubstanceandeffecttoamounttospoliationorwasteofcorporateproperty.ThedissentingopinionofJudgeSwanindicatestheapplicablerule:"Ifabonuspaymenthasnorelationtothevalueofservicesforwhichitisgiven,itisinrealityagiftinpart,andthemajoritystockholdershavenopowertogiveawaycorporatepropertyagainsttheprotestoftheminority."
Thateffectivelyestablishedthelegalrighttoexaminecompensationinpubliccompanies.Butofcourseweknowthat,inspiteofthecaselaw,compensationhasgrownsignificantlyoverthedecades.Andcourtshavebeenreluctanttooverturnthedecisionsofcorporateboards.ThemostnotoriousrecentcasewasthatofMichaelOvitz,whowaspaid$140millionforhis14monthsofworkatDisney.TheDelawareCourtscitedthejudicialrespectforthebusinessjudgmentofdirectorsinrefusingtovoidtheseveranceagreement.
II.CompensationinFinancialFirms
Inthepasttwodecadestherehasbeenmuchdiscussionofexecutivecompensation,manypublicexamplesoflavishpay,butnorealconsensusontheextentoftheproblemifindeedthereisone.Inpart,thisisbecausethereisalackofclarity,indeedalotofconfusionaboutwhatthefactsare.
AlotofthistalkisgoingtobeaboutwhatIconsidertobe“thefacts”ofexecutivecompensationintheU.S.withaparticularemphasisonthecompensationofCEO’s.BeforeIgettothatletmeaddressdirectlytherolethatcompensationplayedinthefinancialcrisis.Thebestwaytodothisistogivenyoualittlecasestudyofcompensationinoneofthefirmsmostheavilybatteredbythefinancialcrisis.
TheStoryofUBS
In the summer of 2005, one of the major players in subprime mortgagecollateralized debt obligations (CDOs), UBS, ramped up its CDO warehousebusiness.1 In this business, UBS would purchase residential mortgage backedsecurities(RMS)primarilymadeupofsubprimemortgages,housethemin itsCDOwarehouse and prepare them for securitization, and then sell the multi‐trancheCDOsinthemarketplace.UBS’sCDOdeskreceivedstructuringfeesonthenotionalvalueofthedealrangingfrom30bpsto150bps,dependingonthecreditqualityofthe tranche. Because this process from start to finish took 2‐4 months, the CDOwarehousewasanimportantcomponentofUBSsvalueatriskandUBSrecognized
1ThisaccountistakenfromUBS’s“ShareholderReportonUBS’sWriteDowns”preparedfortheSwissFederalBankingCommissionandisdiscussedinClementi,G.L.,T.Cooley,M.Richardson,andI.Walter(2009). .
thisassuch.In2005,theCDObusiness,albeitariskyone,workedasintended.UBSfaced short‐term holding risk during the securitization process but wascompensatedbybeingpaidconsiderable fees.Thecreditrisk thatwouldnormallybeheldbybanksormortgagelenderswastransferredtothecapitalmarket.
Startingin2006,however,UBSbegantoholdtheso‐calledAAArated,superseniortranchesoftheCDOsratherthansellthem.ThesetrancheshavethehighestprioritywithintheCDOandthusaresomewhatprotectedbythejuniortranches.Theseniortranchesareonlyhitiftherearesubstantialdefaultsandlowrecoveries.Thatsaid,thesuperseniortrancheswerestructuredtoholdasmuchofthepoolofsubprimeloansaspossibleandstillmaintain theAAAratinggivenbyratingagencies.FromholdingalmostnoneofthesesecuritiesinFebruary2006,theCDOdeskwasholdingover$50billioninSeptember2007.Themainreasonforretainingthesetranchesontheir bookswas that these securities offered a yield aboveUBS’s internal fundingratewhichhoveredaroundLIBOR,yieldinganimmediateongoingprofit.Moreover,
• Because these securitieswere rated AAA , they barely registered onUBS’svalue at risk or stress tests evenwhen totally unhedged.2 Thus, the excessyieldwastreatedaspurealpha.
• As a result of this “pure alpha”, there were no aggregate notional limitsplaced on the CDO warehouse. Thus, every extra dollar of CDOs retainedincreasedthedesk’sprofit.
• Moreover, because the UBS compensation structure did not differentiatebetweenprofitsderivedfromalowcostoffundingversusthegenerationoftrueexcessreturn(i.e.,alpha), thedesk’scompensationwasdirectly linkedtothesizeoftheCDO’smortgagebook.
• Therewasnoliquiditypremiumchargedthegroup.Thatis,therewaslittleornodifferentiationbetweenliquidandilliquidassetseventhoughtherearemanyexamplesofalmost identicalsecuritiesofferingdifferentyields in themarkets(e.g.,off‐the‐runversuson‐the‐runtreasuries).
ThesefactsmeantthattheCDOdeskhadtheincentivetogrowthebalancesheetforCDOs as large as possible because, by construction, their bonuses were tied toinstantprofitswithnorecognitionofanyrisk.Thisgrowthcontinuedevenduringthe first half of 2007 as subprime lenderswere going bankrupt and hedge fundswerereportinglosses.Infact,UBSshutdownoneofitsownoperations,DillonReadCapitalManagement,inMay2007forlossesintheirsubprimeinvestmentportfolio.InMarch2007,theTreasurygroupwithinUBS,alarmedatthetremendousgrowthof UBS’s balance sheet especially in relatively illiquid ABSs, argued for a limit onilliquidassets,ahaircutfundingmodel(inwhichilliquidassetswouldnolongerget
2Amajorityofthesuperseniortrancheholdingswerepartiallyhedgedandtreatedashavingzeroeffectonthefirm’svalueatrisk.
short term funding), and an overall freeze on their balance sheet. This call wasunheeded
Puttingasidetheissueofwhetherthesesecuritiesweretruly“AAA”inquality,thereisnodoubtthattheunderlyingriskwasveryasymmetric.Thatis,thesecuritieswouldpayapremiumaboveLIBORinmoststatesofnature,butintherareeventthatthereweresubstantialdefaultsandlowrecoveries,theywouldallgethit.Historically,thisrareeventwouldariseonlyiftheunderlyingcollateral(i.e.,houseprices)felldramaticallyortherewasasharpeconomicdownturn(i.e.,asinpreviousrecessions).Infinanceterms,duetotheprioritystructureoftheclaims,theholdersoftheseniortranchewereessentiallyinvestedinarisk‐freeasset,likeLIBOR,whilesimultaneouslywritingawayout‐of‐the‐moneyputoptiononthemarket.
Thisisjustonecasestudybutitisastorythatwasrepeatedmanytimesinmanyfirms.
III.CompensationofTopExecutives
Itisimportanttonotethatmosttopexecutivesofbankingandfinancialfirmsarelargelypaidinshares,withatleastsomeminimumretentionperiodrequired,andthatsomeofthetopexecutivesinthebanksthatmelteddownhavelostfortunes,sointhatsensethesystemactuallyworkstopunishmistakes.Thefinancialsectortendstohaveahigherportionofcompensationintheformofstockgrantsthandoothersectorsoftheeconomy.Thisisconsistentwithresearch(Clementiet.al.2006)thatshowsthatrestrictedstockgrantsarethebestwaytoaligntheincentivesofmanagerswiththoseofshareholdersinadynamicsetting.Itmaybethatthefinancialindustryhasabetterseniormanagementpay‐for‐performancetrackrecordthanmanyothersectorsbuttherearesomesignificantcaveatsaswedescribebelow.
Whenwetalkaboutthefactsofexecutivecompensationitisimportanttothinkaboutfactsinthelightoftheory.Thestandardtheorythatweusetothinkaboutthisissueisamodelinwhichamanagerofafirmhaspreferencesdefinedoverconsumptionandeffortandinwhichhiseffortisunobservabletotheownersorshareholders.Theoptimalcontracttoofferamanagerinsuchasettingtoinducetherightamountofeffortisonethatprovidesthemanagerineachperiodcashpaymentscontingentonfirmperformance(thinksalaryplusbonus),contingentstockgrantsthatarecontingentoncurrentandfutureperformanceofthefirmandfuturecontingentcashpayments.
Astructurelikethisisnecessarytokeeptheincentivesofthemanagersalignedwiththeshareholdersinalong‐termsense.Amanager’seconomicinterestinthefirmisdictatednotjustbycurrentcompensationbutalsobytheportionofhis/herwealththatistiedupinthefirm.
Theseunderlyingideasdictatehowwechoosetomeasurecompensation.Weusetwopreferreddefinitionsinourstudy.ThefirstisCEOWealthwhichisdefinedasthesumof:
‐salary
‐bonus
‐expecteddiscountedvalueoffuturesalaries
‐marketvalueofallstockinCEO'sportfolio
‐marketvalueofalloptionsinCEO'sportfolio
‐amountspaidtotheexecutiveunderthecompany'slong‐termincentiveplan
‐ other items such as: severance payments, debt forgiveness, tax reimbursement,signingbonuses,401Kcontributions.
CEOTotalYearlyCompensationisdefinedasthesumof:
‐salary
‐bonus
‐yearonyearchangeinmarketvalueofstockinportfolio
‐marketvalueofstockawardedduringtheyear
‐yearonyearchangeinmarketvalueofoptionsinportfolio
‐Black&Scholesvalueofoptionsawardedduringtheyear
‐amountspaidtotheexecutiveunderthecompany'slong‐termincentiveplan
‐otheritemssuchas:severancepayments,debtforgiveness,taxreimbursement,signingbonuses,401Kcontributions.
Basedonthisdefinition‐essentiallythechangeinCEOwealthassociatedwiththefirm‐itisclearthattotalcompensationcouldbenegativeinayearinwhichthefirm’sstockperformspoorly.Thereisanalternativedefinitionmorewidelyusedontheliterature‐werefertoitasthe“classicaldefinition”–whichiscurrentsalarybonuses,benefits,andthecurrentdatevalueofsecurityawardsbutwhichignoresthechangesinwealthfromthevalueofpastsecurityawards.
TheotherbitoftheoryweoughttohaveinmindwhenweassessCEOpayiswhateconomicshastosayaboutthereturnstohumancapital.Whenwethingaboutthereturnstoscarcehumancapitaltheorytellsusthatgainsgodisproportionatelytothosewiththehighestlevelofskill.Thisiswhatisreferredtoasthe“economicsofsuperstars.”ThereisareasonwhyTigerWoodsmakesasmuchmoneyashedoes.
Now,inlookingatthewholeobservableuniverseofCEO’sandtopmanagersIwanttoaskifthereissomethingbadlywrongwiththesystem.Andifsoisitsomethingthatgovernmentinterventioncouldlikelyaddress–issomethingbroken?Thatthereareabusesisundisputablebuttheimportantquestionforpolicymakersisdoweneedbettergovernanceorgovernmentintervention.Andthenmorebroadly–Iwanttoaskhowwelldocompensationarrangementsaligntheincentivesofmanagerswiththeincentivesofshareholders.Theseareultimatelyempiricalquestionsthatcanbeansweredwithdata.
MostoftheresultsIdescribearebasedonjointworkwithGianLucaClementi.(ClementiandCooley2009).WedrawourdatafromtheEXECUCOMPdatabase,maintainedbyStandard&Poor’s.EXECUCOMPgathersdatafrom1992tothepresentonthecompensationofuptonineexecutivesofallUScompanieswhosestocksaretradedonanorganizedexchange.Thesourceforthedatabasearecompanies’filingswiththeSecuritiesandExchangeCommission.Theinformationaboutexecutives’securitiesholdingsandtheircompensationpackagesiscontainedintheDEF14Aforms(orSchedule14A),filedannuallybyCorporationspursuantSection14(a)oftheSecuritiesExchangeActof1934.Weconfineourattentiontotheyears1992through2006,thelast(fiscal)yearforwhichwehavecomprehensiveinformation.Oursampleconsistsofinformationon31,587executives,employedby2,872companies,foratotalof33,896company–executivematchesand167,822executive–yearobservations.
IV.SomeFacts
1. ExecutiveCompensationishighlyskewed.MuchofthediscussionofexecutivecompensationfocusesattentionontheaveragesalariesofCEO’sandothermanagersbutthatisaverymisleadingindicator.Figures1and2belowshowthedistributionofCEOpaybyquintilefortheyear2006.Asisobvious,thedataarehighlyskewedwiththoseatthelowestquintileshowingnegativecompensation.Forthatreasonitisappropriatetoreportmediansratherthanaverages.
Figure1
Figure2
2. Mediancompensationisextremelyvariableovertime.Oncewetakeaccountofthechangeinwealthcomponentofcompensationthereisalotofvolatilityincompensation.Figure3showshowourmeasurecomparestotheclassicaldefinitionofcompensation.
Figure3
3. Incentiveprovisionhasimprovedovertime.Thetheoryofoptimalcontractingdiscussedaboveimpliesthatthebestincentivesareprovidedwhenexecutivesarerewardedwithdeferredcompensation(compensationthatprovidesfutureconsumptionifthefirmdoeswell)anddeferredcompensationthattakestheformofstockholdings.Figure4and5showthatthishasbeenthepattern.
Figure4
Figure5
4. MedianCEOWealthissignificantlyhigherandincentiveprovisionisbetterintheFinanceInsuranceandRealEstateSector(FIRE)thaninothersectorsoftheeconomy.Figure6showsthecrosssectionaldistributionbysectors.
Figure6
Figure7
100
200
300
400
93 94 95 96 97 98 99 00 01 02 03 04 05 06
Stock OptionsS&P 500 CEO Wealth
1993=100Growth in Median CEO Wealth − Selected Components
5. GrowthinCEOwealthhascloselytrackedthebehaviorofthestockmarket.WhileCEOwealthhasincreasedsharplyovertimeFigure7showsthatwealthhascloselytrackedthebehaviorofthestockmarket.ThisisconsistentwiththeearlierobservationthatCEOpayhasbeenincreasinglyintheformofstockwithadeclininguseofoptions.Thuswealthtendstobehighlycorrelatedwiththebehaviorofthestockmarket.
VTheAlignmentofIncentives
AsInotedatthebeginningofthislecturethecriticalgoalofacontractbetweenaprincipalandanagent,inasettingwherethereisimperfectmonitoringoftheagent,istostructureitsothereincentivesareproperlyaligned.Howdoweassessthat?IntheliteratureonexecutivecompensationthereareahostofeconometricassessmentsoftheofthesensitivityofCEOcompensationtochangesinshareholderwealth.ClementiandCooley(2009)presentseveralapproachestoestimatingthisanddiscusssomeofthepitfalls.InkeepingwiththevisualthemeofthislectureIwanttopresentasimplesummaryoftherelationshipofinterest.Thescatterplotbelow,Figure8,presentsontheverticalaxistotalcompensation(measuredaschangesinwealth)inmillionsof2005dollars,whilethehorizontalaxisrepresentsnetshareholdergain,inbillionsofdollars.
Ifindthispicturequitecompelling.IntheupperlefthandquadrantwecanseeallofthestoriesthatmakeheadlinesasexampleofCEOpayexcess.Forexample,includedinthissampleisconsiderthecaseofDouglasIvester,theCEOofCoca–ColaCo.fromOctober1997toFebruary2000.Duringthe1999fiscalyear,Coca–Cola’sshareholderslostabout14%,orabout22.5billiondollars.Accordingtoourcalculations,inthesameyear,Mr.Ivestermadeabout74milliondollars.
Figure8
−150
−100
−50
0
50
100
150
Tota
l Com
pens
atio
n (M
illion
s)
−15 −10 −5 0 5 10 15
Net Shareholder Gain (Billions)
2005 dollarsTotal Yearly Compensation and Shareholder Gain
ThereareclearlymanyotherstorieslikeMr.Ivester’s.Itissurprisingtomethattherearesofewandthatbyandlargethesystemseemstoalignpaywithperformanceprettywell.
VIConclusions
Therehasbeenmuchrighteous,well‐deservedangeraboutthecompensationofexecutives.Muchofitderivesfromtheextravagantpaylevelsrealizedbyfinancialexecutivesoverthepastdecadeofso.Thisleadstowellunderstoodangeraboutexecutivecompensationwritlargeandtocallsforgovernmentintervention.Thereinliestheproblem.Mygoalinthislecturehasbeentotakeadispassionatelookatthefactsofexecutivecompensationandthealignmentofincentivesbetweenshareholdersandmanagers.Withoutsayinganythingabouttheappropriatenessofthelevelsofcompensation,Iconcludethatthesystemdoesnotappearbadlybroken
andinneedofgovernmentintervention.Therearemanyexamplesofflaweddecisionsbutonthewholethesystemseemstoalignincentivesquitewell.
TheproblemsthatleadtothefinancialcrisiswerenotsomuchproblemsofCEOortopmanagementpaybutproblemsthatoccurredfurtherdownthechainofcommand.AsinthecaseofUBS,theincentivesystemforthosewhomanageprofitmakinglinesofbusinesswithinfinancialfirmsistoooftentiedtoshorttermandincorrectmeasuresofprofits.Therearerelativelysimplefixesforthoseflawsthatdon’trequiremajorfederalintervention.
References
Bebchuk,L.,andJ.Fried(2004):PayWithoutPerformance.TheUnfulfilledPromiseofExecutiveCompensation.HarvardUniversityPress,Cambridge,MA.Bebchuk,L.,andY.Grinstein(2005):“TheGrowthofExecutivePay,”OxfordReviewofEconomicPolicy,21(2),283–303.Berle,A.A.,andG.C.Means(1932):TheModernCorporationandPrivateProperty.MacMillan,NewYork,NY.
Clementi,G.L.,T.Cooley,M.Richardson,andI.Walter(2009):“RethinkingCompensationinFinancialFirms,”inRestoringFinancialStability,ed.byV.Acharya,andM.Richardson.JohnWileyandSons.Clementi,G.L.,T.Cooley,andC.Wang(2006):“StockGrantsasaCommitmentDevice,”JournalofEconomicDynamicsandControl,30(11),2191–2216.Clementi,G.L.,andT.Cooley(2009):“ExecutiveCompensation,TheFacts,”NBERWorkingPaper#15426,October2009.