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Bank Ceo Incentives And The Global Financial Crisis

3331 words - 13 pages

Fahlenbrach and Stulz (2011) stated that bank CEO incentives can't be answerable for the credit crisis, as their incentives appeared to be aligned with their interest of their shareholders. Find no evidence that they performed better (Fahlenbrach and Stulz 2011). Fahlenbrach & Stulz (2011) discover verification that banks with higher shareholder- management incentive alignment, options holdings or through stock executed worse during the financial crisis. They conclude, “This evidence recommends that CEOs took exposures that they feel were profitable for their shareholders ex ante but that these exposures performed very poorly ex post. Fahlenbrach and Stulz discover no evidence that the incentive arrangement of senior management lead to risk-taking that benefitted themselves at the expense of stakeholders or shareholders in the firms. Instead, they argue that given the important stakes held in their firms by senior management, their long-term interests were suitably aligned to those of the stockholders. Bank with grater- option and larger fraction compensation in bonuses for their CEOs did not perform worse during the crisis. A current study by Fahlenbrach and Stulz (2009) of a sample of bank CEOs reports that base salaries constitute only about 10% of total compensation, and that the wealth of these CEOs increases by an average of about $24 for every $1,000 of shareholder value created. And this, of course, represents a dramatic improvement in the original estimates reported by Jensen and Murphy. Fahlenbrach and Stulz (2011) note that the top five best paid executives in financial services in 2006 were CEOs of Lehman brothers, Bear Stearns, Merrill lynch, Morgan Stanley and country Finance. Only one of these companies survived crisis as an independent operation. Lack of alignment of bank CEO incentives with shareholders interests cannot be blamed for the credit crisis for the performance of banks during that crisis. Suntheim (2010) shows that institution whose CEOs had more incentives to take risks performed worse. Moreover, a whole host of papers fined that higher risk taking incentives did indeed lead to higher volatility. The only result that maybe surprising at first glance is that of Fahlenbrach and Stulz (2011).Rudiger Fahlenbrach and Rene Stulz (2009) test these implications by studying the CEOs of almost one hundred large financial institutions from 2006 to 2008. They start in 2006 because that is a good candidate for the poit at which financial firms took on the risky positions that led to the crisis. In 2006 the mean CEO took home $3.6 million in cash compensation, which represented less than half of total compensation. The larger share of pay was in restricted stock and options. In other words, the CEO took home $3.6 million in cash, on average, while leaving more than twenty four times as much in his or her firm. It seems unlikely that the upfront cash pay provided much of incentives for the average CEO knowingly take bad or...

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