"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.