Standard pay arrangements reward executives for short-term gains and generate incentives for them to take excessive risks and trade off long-term stock performance, says an in-depth Harvard study on how to tie compensation to shareholder value.
“The standard narrative assumed that the executives of [Bear Stearns and Lehman Brothers] saw their own wealth wiped out together with the firms when the firms melted down,” said one of the study’s authors, Lucian Bebchuk, a Harvard Law School professor and director of the school’s program on corporate governance, in a Tuesday, June 15, webinar about the study’s findings.
However, the top-five 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 from 2000 to 2008, a webinar PowerPoint states.
“We find that the standard narrative is in fact incorrect,” Bebchuk said. “That narrative led to the inference that the risk-taking by those firms might have been the product of mistaken judgment or misperceptions or hubris, but it could not have been motivated by perverse pay incentives because the executives’ personal wealth was largely wiped out.”
In the past few years, Bebchuk has gained a reputation for being an unwelcome guest at the executive compensation party. His calls for reform include limiting executive control over the date that stock awards are granted, creating anti-hedging policies that prevent executives from betting against their own companies, and increasing the government’s role in giving shareholders the tools to change pay structure.
Sponsored by New York-based nonprofit the IRRC Institute, the Executive Compensation Research Series includes these three published reports:
1) The Wages of Failure: Executive Compensation at Bear Stearns & Lehman 2000-2008
2) Paying for Long-Term Performance
3) Regulating Bankers’ Pay
The IRRC Institute was established with the proceeds from the sale of the Investor Responsibility Research Center to Institutional Shareholder Services (now RiskMetrics) in 2006. This predecessor organization was founded in 1972 and was designed to provide impartial information on corporate governance and social responsibility.