As part of his “Rules of the game” series for Project Syndicate, Harvard Law School Professor Lucian Bebchuk recently wrote the op-ed, “How to pay a banker,” which appeared on the website on July 27.
Bebchuk, who is the William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, recently co-authored “Regulating Bankers’ Pay” with HLS Lecturer on Law Holger Spamann. The paper is available for download on the Social Science Research Network (SSRN) website.
The United States’ Federal Reserve Board recently adopted a policy under which bank supervisors, the guardians of the financial system’s safety and soundness, would review the compensation structures of bank executives. Authorities elsewhere are considering or adopting similar programs. But what structures should regulators seek to encourage?
It is now widely accepted that it is important to reward bankers for long-term results. Rewarding bankers for short-term results, even when those results are subsequently reversed, produces incentives to take excessive risks.
But tying executive payoffs to long-term results does not provide a complete answer to the challenge facing firms and regulators. The question still remains: long-term results for whom?