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The 2007-2009 Financial Crisis and Executive Compensation: An Analysis and a Proposal for a Novel Structure

31 Pages Posted: 17 Jun 2009 Last revised: 7 Oct 2009

Alon Raviv

Bar-Ilan University - Graduate School of Business Administration

Yoram Landskroner

Hebrew University of Jerusalem - Department of Finance and Banking; New York University (NYU) - Leonard N. Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 16, 2009

Abstract

During the 2007-2009 crises financial institutions have come under increasing pressure from regulators, politicians and shareholders to change their compensation practices in order to remove the incentive for short term excessive risk taking.

In this paper we analyze how commonly used executive compensation plans can lead to two socially undesirable outcomes: excessive risk taking at one extreme and complete freeze of new lending on the other. We propose adding a new component to the executive compensation which is paid only if the value of the firm will be located in some predetermined range. This components will push the executive towards the first best solution in which an intermediate (internal solution) level of assets risk will be optimal because of the convex relationship between assets risk and compensation value.

Keywords: compensation practices, executive compensation, excessive risk taking, executive stock options, financial crisis

JEL Classification: G12, G13, G21, G28, G38, E58

Suggested Citation

Raviv, Alon and Landskroner, Yoram, The 2007-2009 Financial Crisis and Executive Compensation: An Analysis and a Proposal for a Novel Structure (June 16, 2009). Available at SSRN: https://ssrn.com/abstract=1420991 or http://dx.doi.org/10.2139/ssrn.1420991

Alon Raviv (Contact Author)

Bar-Ilan University - Graduate School of Business Administration ( email )

The Graduate School of Business Administration
Ana and Max Web st
Ramat Gan
Israel

Yoram Landskroner

Hebrew University of Jerusalem - Department of Finance and Banking ( email )

Mount Scopus
Jerusalem, 91905
Israel

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

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