Follow the Money: Compensation, Risk, and the Financial Crisis
6 Pages Posted: 8 Sep 2014
Date Written: September 8, 2014
This Closer Look illustrates the relation between executive compensation and organizational risk through the context of the financial crisis of 2008. We demonstrate that the incentives that bankers had to increase firm risk not only increased but increased substantially in the years preceding the financial crisis.
• How well do boards understand the relation between compensation and risk? • How much attention do directors pay to the risk-taking incentives provided by CEO wealth? • Do boards consider the relation between incentives and the risk tolerance of the firm? • How much risk should an executive be encouraged to take?
The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.
Keywords: 2008 financial crisis, risk-taking incentives, executive compensation, board of directors risk oversight, risk tolerance, financial incentives, corporate governance
JEL Classification: G14, G20, G28, G30, K2
Suggested Citation: Suggested Citation