July 12, 2010
A recent study, “The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008,” by Professor Lucian A. Bebchuk LL.M. ’80 S.J.D. ’84, Visiting Professor Alma Cohen [Photo below right] and Lecturer on Law Holger Spamann S.J.D. ’09 [Photo below left] refutes the widespread assumption that the wealth of the top executives at Bear Stearns and Lehman Brothers was largely wiped out when their companies collapsed. According to the authors, many have used this account to dismiss the view that pay structures caused excessive risk-taking, but, they say, that standard narrative turns out to be incorrect.
Their study is scheduled to be published in the Summer 2010 edition of the Yale Journal on Regulation.
In a case study of compensation at those firms from 2000-2008, the authors found that instead of decreasing bonuses as their companies declined, these executives cashed out large amounts of bonus compensation and money from sold shares. The authors estimate that during this time the top executive teams at each company derived cash flows of about $1.4 billion and $1 billion respectively from cash bonuses and equity sales.
By quantifying the compensation of those years, the authors show these cash flows “substantially exceeded the value of the executives’ initial holdings in the beginning of the period and the executives’ net payoffs for the period were thus decidedly positive.” By disproving the widespread assumption, the case is made that incentives for executives to partake in risky investments do exist.
In a December 7, 2009 op-ed in the Financial Times, “Bankers had cashed in before the music stopped,” the authors discuss their findings.
The director of the Program on Corporate Governance at Harvard Law School, Bebchuk is the William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance. Cohen, a professor of economics at Tel Aviv University, is a visiting professor at HLS. She will co-teach, with Charles Wang, Empirical Law and Economics in the Fall Term 2010. Spamann is a lecturer and co-executive director of the Program on Corporate Governance at Harvard Law School.