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

32 Pages Posted: 22 Oct 2010  

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: May 24, 2010

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 risky activities (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. These components will push the executive towards the first best solution in which a moderate (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, risk taking, regulation, 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 (May 24, 2010). Paris December 2010 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=1695490 or http://dx.doi.org/10.2139/ssrn.1695490

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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