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Executive Compensation at Bear Stearns and Lehman 2000-2008
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Research Findings
The collapse of Bear Stearns and Lehman Brothers in 2008 has triggered debates on the role of executive compensations in inducing risk-taking behavior. The implication is far-reaching given that executive pay reforms have been proposed to prevent another financial crisis.
A 2009 study from researchers at Harvard University and Tel Aviv University, “The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008,” shows that the companies’ pay arrangements provided considerable incentives for their executives to take excessive risks.
The study finds that:
- Between 2000 and 2008, the top executive teams of Bear Stearns and Lehman Brothers earned about $1.4 billion and $1 billion respectively from cash bonuses and equity sales. These cash flows far exceeded the value of the executives’ initial holdings at the beginning of the period.
- The executives did not sell off all their shareholdings in 2007 suggesting that they did not anticipate the firms’ imminent bankruptcies.
- Although there is a possibility that the executives decisions could be due to their failure in recognizing risks, the role of their pay arrangements in influencing excessive risk-taking behavior cannot be dismissed.
The authors conclude by proposing for reforms to encourage executives to place more weight on long-term stock prices. An example would be to impose limits on executives’ sales of options and shares.
Tags: economy, ethics, financial crisis, law
Teaching Notes
Note to instructor: The suggested assignments are designed for flexibility. They can be used in whole or part and can be adapted to a particular task -- for example, the newswriting assignments could be applied to the writing of the headline, the lead, the nut graph or the full story. Material from the assignments could also be combined with other material, for example, in the writing of a background, feature or local-angle story.
Analysis assignments
Read the study titled "The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008."
- Summarize the study in fewer than 40 words.
- Express the study's key term(s) in language a lay audience can understand.
- Evaluate the study's limitations. (For example: Do the results conflict with those of other reliable studies? Are there weaknesses in the study's data or research design?)
Read the study-related New York Times article titled "Executives Kept Wealth as Firms Failed, Study Says ."
- Reporter's use of the study: Evaluate what the reporter chose to include and exclude from the study. Would the audience have acquired a clear understanding of the study's findings and limits from this article?
- Reporter's use of other material: Assess the material in the article that is not derived from the study. (for example: Does the reporter place the study in the context of other research and to what effect? Does the reporter include reactions to the study from other researchers or interested parties [e.g., political groups business leaders, or community members] and are their credentials or possible biases made clear?)
Newswriting assignments
- Write a lead (or headline or nut graph) based on the study.
- Spend 60 minutes exploring the issue by accessing sources of information other than the study. Write a lead (or headline or nut graph) based on the study but informed by the new information. Does the new information significantly change what one would write based on the study alone?
- Interview two sources with a stake in or knowledge of the issue. Be prepared to provide them with a short summary of the study in order to get their response to it. Write a 400-word article about the study incorporating material from the interviews.
- Spend additional time exploring the issue and then write a 1,200-word background article, focusing on major aspects of the issue.
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Executive Compensation at Bear Stearns and Lehman 2000-2008 … city university
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