Executive Short-Term Incentive, Risk-Taking and Leverage-Neutral Incentive Scheme

G. Kaplanski; Haim Levy

Executive Short-Term Incentive, Risk-Taking and Leverage-Neutral Incentive Scheme

G. Kaplanski
, Haim Levy

School of Business Administration

Research output: Contribution to conference › Paper › peer-review

Abstract

In 23 out of 26 US industries, the annual CEO bonus is larger than the annual salary, suggesting that the bonus strongly affects the CEO's decisions. As the high leverage of financial institutions is often blamed for the 2008 financial crises, in this study we focus on leverage as a factor determining risk, particularly in financial institutions. The typical bonus scheme is not a leverage-neutral bonus scheme (LNBS), as the agent's optimal policy is to employ a corner solution: either zero or exteremely high leverage. Thus, consistent with Ross (2004), the bonus scheme does not neccesarily induce the agent to take greater risks. However, although more leverage is not prefered by all preferences, in most cases it is prefered. Thus, we suggest a combination of incentive parameters, which makes the agent indifferent to leverage, thereby preventing conflict beween the agent and the principal (stockholders).

Original language	American English
State	Published - 2010
Event	Financial Models, between Academics and Practice of AMCB - The Aharon Meir Center for Banking - Ramat Gan, Israel Duration: 1 Jun 2010 → 1 Jun 2010

Conference

Conference	Financial Models, between Academics and Practice of AMCB - The Aharon Meir Center for Banking
Country/Territory	Israel
City	Ramat Gan
Period	1/06/10 → 1/06/10

Financial Models, between Academics and Practice of AMCB - The Aharon Meir Center for Banking
Kaplanski, G. (Participation - Conference participant)
1 Jun 2010
Activity: Participating in or organizing an event › Organizing a conference, workshop, ...

Cite this

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title = "Executive Short-Term Incentive, Risk-Taking and Leverage-Neutral Incentive Scheme",

abstract = "In 23 out of 26 US industries, the annual CEO bonus is larger than the annual salary, suggesting that the bonus strongly affects the CEO's decisions. As the high leverage of financial institutions is often blamed for the 2008 financial crises, in this study we focus on leverage as a factor determining risk, particularly in financial institutions. The typical bonus scheme is not a leverage-neutral bonus scheme (LNBS), as the agent's optimal policy is to employ a corner solution: either zero or exteremely high leverage. Thus, consistent with Ross (2004), the bonus scheme does not neccesarily induce the agent to take greater risks. However, although more leverage is not prefered by all preferences, in most cases it is prefered. Thus, we suggest a combination of incentive parameters, which makes the agent indifferent to leverage, thereby preventing conflict beween the agent and the principal (stockholders).",

author = "G. Kaplanski and Haim Levy",

year = "2010",

language = "American English",

note = "Financial Models, between Academics and Practice of AMCB - The Aharon Meir Center for Banking ; Conference date: 01-06-2010 Through 01-06-2010",

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TY - CONF

T1 - Executive Short-Term Incentive, Risk-Taking and Leverage-Neutral Incentive Scheme

AU - Kaplanski, G.

AU - Levy, Haim

PY - 2010

Y1 - 2010

N2 - In 23 out of 26 US industries, the annual CEO bonus is larger than the annual salary, suggesting that the bonus strongly affects the CEO's decisions. As the high leverage of financial institutions is often blamed for the 2008 financial crises, in this study we focus on leverage as a factor determining risk, particularly in financial institutions. The typical bonus scheme is not a leverage-neutral bonus scheme (LNBS), as the agent's optimal policy is to employ a corner solution: either zero or exteremely high leverage. Thus, consistent with Ross (2004), the bonus scheme does not neccesarily induce the agent to take greater risks. However, although more leverage is not prefered by all preferences, in most cases it is prefered. Thus, we suggest a combination of incentive parameters, which makes the agent indifferent to leverage, thereby preventing conflict beween the agent and the principal (stockholders).

AB - In 23 out of 26 US industries, the annual CEO bonus is larger than the annual salary, suggesting that the bonus strongly affects the CEO's decisions. As the high leverage of financial institutions is often blamed for the 2008 financial crises, in this study we focus on leverage as a factor determining risk, particularly in financial institutions. The typical bonus scheme is not a leverage-neutral bonus scheme (LNBS), as the agent's optimal policy is to employ a corner solution: either zero or exteremely high leverage. Thus, consistent with Ross (2004), the bonus scheme does not neccesarily induce the agent to take greater risks. However, although more leverage is not prefered by all preferences, in most cases it is prefered. Thus, we suggest a combination of incentive parameters, which makes the agent indifferent to leverage, thereby preventing conflict beween the agent and the principal (stockholders).

M3 - Paper

T2 - Financial Models, between Academics and Practice of AMCB - The Aharon Meir Center for Banking

Y2 - 1 June 2010 through 1 June 2010

ER -

Executive Short-Term Incentive, Risk-Taking and Leverage-Neutral Incentive Scheme

Abstract

Conference

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Financial Models, between Academics and Practice of AMCB - The Aharon Meir Center for Banking

Cite this