Compensation Expert Witness On Bank Executive Compensation Part 2

Compensation expert witness Dr. Sanjai Bhagat presented his paper Bank Executive Compensation And Capital Requirements Reform this month to the Board of Governors of the Federal Reserve System, Washington DC.

Abstract, Part 2
We recommend the following compensation structure for senior bank executives: Executive incentive compensation should only consist of restricted stock and restricted stock options – restricted in the sense that the executive cannot sell the shares or exercise the options for two to four years after their last day in office.

The above equity based incentive programs lose their effectiveness in motivating managers to enhance shareholder value as a bank’s equity value approaches zero (as they did for the too-big-to-fail banks in 2008). Hence, for equity based incentive structures to be effective, banks should be financed with considerable more equity than they are being financed currently.

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