Should Ceos Compensation Be Capped During the Money Crisis

Based on the reading and finding of this particular objective which is, should the executive compensation be capped during the credit crisis on 2007-2008, we have found that the executive teams of firms cashed out large amounts of performance-based compensation during the 2000-2008 periods. During this period, they were able to cash out large amounts of bonus compensation that was not clawed back when the firms collapsed, as well as to pocket large amounts from selling shares. This is approved by Lucian where the top executive of Bear Stearns Lehman Brothers derived cash flows pf about $1.4 billion and $1 billion respectively from cash bonuses and equity sales during the credit crisis. These cash flows substantially exceeded the value of the initials holdings of the executive in the beginning of the period and resulting the executive’s net payoffs for the period were decidedly positive (Lucian A., 2010).

When this is happened, the Bear Stearns ended up selling itself to JP Morgan in March 2008 for a per share price equal to about a quarter of the January 2000 stock price while Lehman filed for bankruptcy in September 2008. Shareholders holding the companies’ share from 2000 to 2008 lost most of the value if their 2000 position. This is because initially the two top executive teams produced stellar returns, quadrupling their firms’ stock price from January 2000 to January 2007. Unfortunately, in the next 15 to 17 months both stocks collapsed. During this tragedy, the top executive teams received their compensation in cash within a vast amount causing the decrease in the firm’s capitalization. This is one of the reasons where executive compensation should be capped during the credit crisis.

References

Lucian A., B. A. (2010). Wages of Failure: Executive Compensation At Bear Stearns And Lehman 2000-2008. 27 Yale J, 257.