Contingent Capital in Executive Compensation

43 Pages Posted: 2 Sep 2012  

Wulf A. Kaal

University of St. Thomas, Minnesota - School of Law; European Corporate Governance Institute (ECGI)

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Date Written: 2012

Abstract

Contingent capital has great potential to improve corporate governance in Systemically Important Financial Institutions (SIFIs). Early initiatives by European SIFIs to include contingent convertible bonds in executive compensation packages lack governance improving designs. This article suggests the use of contingent convertible bonds with an early conversion trigger in executive compensation. The proposal adds an important element to the literature on inside debt and the creditor-centered approach to executive compensation. Contingent convertible bonds with early triggers could be preferable to other debt instruments because, in addition to lowering income inequality and increasing sustainability, the early trigger design can improve incentives for executives to lower risk taking, improve signaling of default risk, and increase incentives for monitoring by creditors and shareholders. The recognition of ownership characteristics in design features adds an important element to the literature on contingent capital trigger designs. The methodological assumptions of incomplete contract theory can improve the analysis of executive compensation arrangements.

Keywords: Executive Compensation, Contingent Capital, Corporate Governance, Trigger Designs

Suggested Citation

Kaal , Wulf A., Contingent Capital in Executive Compensation (2012). Washington and Lee Law Review, Vol. 64, 2013; U of St. Thomas Legal Studies Research Paper No. 12-22. Available at SSRN: https://ssrn.com/abstract=2139798

Wulf A. Kaal (Contact Author)

University of St. Thomas, Minnesota - School of Law ( email )

MSL 400, 1000 La Salle Avenue
Minneapolis, MN Minnesota 55403-2005
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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