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

33 Pages Posted: 15 Jul 2009

See all articles by Alon Raviv

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

Date Written: June 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 first how the common executive compensation, which is composed of equity-based compensation (stocks and executive stock options) and a fixed cash compensation, leads to a concave relationship between assets risk and compensation value and creates an incentive for the executive to choose corner solutions that either lead to an excessive risk taking or to a freeze out of the lending activity to the public.This paper’s main contribution is a novel component, for executive compensation, that is paid only if the value of the firm assets is located in some predetermined range. This new form of compensation motivates the executive to take an intermediate (internal solution) level of assets risk because of the convex relationship between assets risk and compensation value.

Suggested Citation

Raviv, Alon and Landskroner, Yoram, The 2007-2009 Financial Crisis and Executive Compensation: Analysis and a Proposal for a Novel Structure (June 2009). NYU Working Paper No. FIN-09-003, Available at SSRN: https://ssrn.com/abstract=1433939

Alon Raviv

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
Suite 9-160
New York, NY NY 10012
United States

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