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The 2007-2009 Financial Crisis And Executive Compensation: Analysis And A Proposal For A Novel Structure

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Executive Summary

In this paper the authors analyze first how the common executive compensation, which is composed of equity-based compensation (stocks and executive stock options) and a fixed cash compensation, leads to a concave relationship between assets risk and compensation value and creates an incentive for the executive to choose corner solutions that either lead to an excessive risk taking or to a freeze out of the lending activity to the public. This paper's main contribution is a novel component, for executive compensation, that is paid only if the value of the firm assets is located in some predetermined range.

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