US Financial Crisis: No Limits on Executive Compensation?
|
Code : ECC0021
|
Region : US |
||||
 |
 |
 |
 OR |
||
|
Financial Market and Performance Rewards for the Executives – A Gamble In the period of consolidation during 1970s and 1980s, across industries in the US, companies gave an attractive severance package for an expelled CEO in the form of 'golden parachute'5.As a result, in 1986, the government brought a change in the tax code charging a penalty tax on excessive golden parachute payments, which was more than three times of an executive's base pay.However, due to rising criticismagainst golden parachutes, financial companies introduced stock options as the primary form of compensation by aligning management and shareholder interests. The Current US Financial Crisis: The Role of CEOs "If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience,"13 once remarked George Bernard Shaw. Thus, shedding light on man's perpetual inability to learn from experience, history repeated itself once again in the form of US financial crisis... |
|
| For Case Books
Click Here >> For Case eBooks Click Here >> |
|
Reasons for the Current Financial Crisis The problems started percolating post-9/11 attacks due to the economic recession. Moreover, the resultant easy credit,made available in a bid to avert recession, characterisedmost of the decade. In order to boost the economy and encourage more consumer borrowing, the Federal Reserve Board lowered the interest rates. Gradually, consumer spending increased to 70%of the US economy, as compared to 60%of the early 1980s.14 The low interest rates also resulted in demand for home loans and to cater to the increased demand, commercial banks encouraged subprime mortgages. As such, the housing bubble started building.
How CEO Pay Fuelled the Crisis? CEO pay was under fire and was held responsible for creating the subprime mortgage crisis. Most of the CEOs have their incentive compensation linked to performance that brought in financial results without regard to the risk involved in generating those results. Hence, financial companies focussed on revenue growth, thus encouraging CEOs to venture into the subprime lending business during the peak of the real estate market...
