Expert Commentary

Executive compensation at Bear Stearns and Lehman Brothers, 2000-2008

2009 Harvard University and Tel Aviv University study on whether the firms' executive compensation encouraged incentives for executives to take excessive risks.

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

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