It is difficult to deny that investment banking executive compensation is short-term incentivised and is highly related to individual performance. This pay structure effects managers’ behavior by pushing them to achieve more, but also by providing them with greater incentives to take additional risk with limited liability. This skewed incentives played an important role in stimulating the global financial crisis. Motivated to increase their personal pay, managers exposed shareholders to significant losses by engaging in gambling in order to manipulate their performance results. Increased executive compensation during the crisis resulted in rising economic inequality with top earners taking home even bigger paychecks while average employee income has deteriorated (quote here). Also, when taking inappropriate risk, trying to inflate their compensation, bankers further contributed to rapidly increasing volatility of the financial services industry and its credit bubble. In addition to improper incentives (individual vs. team pay for performance and short-term vs. long-term targets), there have been some high-profile examples in the recent years of corporate governance failure due to corrupted boards of directors. This happens when top executives’ performance is not connected to compensation; managers design their own pay packages and control the board by bribing directors with deals, such as access to private jets, for example. Lucian Bebchuk and Jesse Fried, authors of the 2004 book “Pay Without Performance”, conclude that “flawed compensation arrangements have not been limited to a small number of ‘bad apples’; they have been widespread, persistent, and systematic.” In light of the recent global financial crisis, should regulations be put in place for executive compensation in the financial service industry in order to decrease the growing gap between rich and poor? Some Arguments in favour of regulations are as follows:
Given current slow moving economy,...
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