Best Practices for Executive Compensation: Reduce Incentives for Risk-Taking

At the New York Times blog Deal Book yesterday, Lucian Bebchuck and Holger Spamann discuss one of the hottest topics in corporate governance over the last 24 months: executive compensation.

Bebchuck is a professor of law, economics, and finance, as well as the director of the corporate governance program at Harvard Law School. Spmann is the co-ececutive director and fellow of the corporate governance program at Harvard Law School. Together, they wrote a paper entitled “Regulating Bankers’ Pay” that discusses their ideas for how to effectively manage executive compensation.

Their article at DealBook bults upon on the ideas in the aforementioned aritcle and provides intriguing insight into this ongoing issue. Below is an excerpt and link for your convenience:

Reducing Incentives for Risk-Taking

It is now widely accepted that compensation structures in financial firms should be devised to avoid excessive incentives for risk-taking and that doing so requires tying executive compensation to long-term results and preventing cashing out of large amounts of compensation on the basis of short-term results.

What long-term “results” are we talking about though? We propose that risk-taking incentives could be improved by tying executives’ pay not only to the long-term payoffs of shareholders but also to those of preferred shareholders, bondholders and taxpayers insuring depositors.

Tags: corporate governance, dealbook, executive pay, Harvard Law School, holger spamann, lucian bebchuck