US Financial Crisis: No Limits on Executive Compensation?


Code : ECC0021

Year :

Industry : Banking, Insurance and Financial Services

Region : US

Teaching Note: Available

Structured Assignment : Available

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Abstract: Remember Gordon Gekko's signature line in the Hollywood movie Wall Street, "Greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA." This became the corporate mantra for most of the executives in the US financial services market.

The stock market boom in the 1990s brought in windfalls for financial executives, whose pay was linked to company's stock price performance. This increase in pay was attributable to the grant date value of stock option grants. Their greed was rewarded with huge incentives even at the cost of their companies' poor performance.

As predicted by analysts, sky fell on US financial services industry. In 2008, stock market crashed at an all-time low, leading to one of the worst financial crises ever since the Great Depression. The big financial institutions of the world like Merrill Lynch, Morgan Stanley, Goldman Sachs, Citigroup, Wachovia, Washington Mutual, etc., lost their fortunes. Many blamed the CEO compensation as the culprit for the economic fallout. However, few analysts opine that as the US financial corporations have increased in size dramatically over the past decade, the CEOs of these large financial companies became accountable to the shareholders, which in turn forced them to 'cook the books'. Although the urge to earn more and the need to survive in the competition prompted these executives to resort to malpractices, but does not seem a fair excuse as the corporate governance practices are under threat.

But, few questioned why a CEO's pay is scrutinised only when companies are doing badly and not when they are doing extremely well? Who should be blamed for the gamble the CEO or the system?

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Pedagogical Objectives:

  • To examine the role of CEO in ensuring the company's long-term profits while managing risks and returns
  • To figure out how far CEO's pay packages inspired the erstwhile investment banks to embrace high risk financial derivatives
  • To debate on who should be held responsible for the failure of the financial services institutions in the US.

    Keywords : Financial crisis, Subprime Mortgage, Executive pay, CEO, Boards, Governance, Compensation, ESOPS, Sarbanes Oxley, Bailout, Housing Bubble

    Contents :
    Financial Market and Performance Rewards for the Executives A Gamble
    The Current US Financial Crisis: The Role of CEOs
    Reasons for the Current Financial Crisis
    How CEO Pay Fuelled the Crisis?

    Case Introduction >>

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