Florida State University Law Review
Florida State University Law Review
Volume 41 Issue 3 Article 2
Spring 2014
Pay as Risk Regulation
Pay as Risk Regulation
Andrew C.W. Lund
Pace University School of Law
Follow this and additional works at: https://ir.law.fsu.edu/lr
Part of the Banking and Finance Law Commons
Recommended Citation Recommended Citation
Andrew C. Lund, Pay as Risk Regulation, 41 Fla. St. U. L. Rev. 609 (2013) .
https://ir.law.fsu.edu/lr/vol41/iss3/2
PAY
AS RI
SK
REGU
LAT
ION
AND REW C.W . LUND
∗
A BSTRACT
How do we p reven t fin anc ial in stit utio ns fro m tak ing ex cessi ve risk w hen th e p ubl ic
fisc nci ina t f e recen th fter over a eft s l ion uest l q ntra he ce f t ne o is o his r? T dito s cre serves a al wo o T ers. nsw sed a ropo of p age hort no s een as b there h rs, e yea fiv ast he p or t , f s and crisi f nd ns a ctio stri g re din tra etary pri pro n— atio gul re te ex an r fo ates did can pular e po mor the
enha nced capi tal requi rem ents —ar e o n the ir w ay t o b eing ena cte d in o ne f orm or a nothe
r, ore m rd, thi , a hile eanw . M acy effic ate ltim d u an cost eir th ver y o vers ntro e co som ith w eit alb ind irec t a ppro ach ha s sp rout ed in the pag es of law an d fin anc e jo urna ls under w hich
bank lte y a reb the bt, nk de ba clude in d to uste adj d be oul w ges cka n pa atio pens om s’ c ager man rin
g U.S. on- n n rtai ce ace at n pl t i n pu bee ven as e h h oac is appr Th es. tiv cen g in akin sk-t ir ri the finan cia l inst itut ions . T his Art icle offe rs a cr itic al a ppr ais al o f reg ula tin g b ank ri sk-t aki
ng sk- e ri rat elio am to ely ss lik s le ” i y pay n b atio gul re isk “R gn. esi pay d ive ecut h ex oug thr tak ing tha n m ore d irec t a ppro ach es beca use b ank m ana ger s with caree r con cern s w ill con
- ng ati egul , r ver oreo sk. M ri firm of vels h le hig on ake to t es ntiv ince ant nific sig face to tinue by pay is an in apt s olut ion whe re mar gina l m oni tor ing co sts for credito rs a re rel ati vel y lo
w h pay oug thr risk nk g ba atin regul for se e ca th ead, nst . I ing tor oni k m ban ith se w e ca th as is redesi gn must b e g rou nded in a pessi mis tic v iew of re gul ato r age ncy cost s i n a syst em o
f with aced rs f ato gul ed re mis pro com how ee , to s ever ow d, h har It is n. tio ula l reg tia den pru bro ad d iscr etio n w oul d b e much bet ter a t im ple men tin g a pay reg ulat ion reg im e. T hus , t
he im me the sa ely larg ith d w fflicte ill be a ay w y p n b tio ula reg isk f r on o ersi e v tiv effec most - of act ery f he v e, t ors n w Eve n. tio ula sk reg t ri irec , d nal itio trad s as em obl n pr atio ent plem risk re gul atio n b y pay, no mat ter how m ode stl y pr opo sed , m akes it more l ike ly th at tr adi
- e off ors r w edito -cr t-as men ern gov he ng t eavi , l phy tro er a rth ill fu g w orin onit t m irec nal d tio than be for e.
I. I NTRODUCTION
.... ... ... ... ... ... ... ... ...
610 T II.
HE D EBT C OMPENSATION
P ROPOSALS .... ... ... ... ... ..
613 ... ... .... s ponse Res ory lat egu ct R ire d D d an azar H oral ank M B A. 614 ... ... ... ... ... ... ... .... ebt ith D g w ayin P B. 616 . ... ... ... ... ... ... .... s posal Pro The 1. 618 ... ... ... ... ... ... .... s ique Crit lier Ear 2. 621 EBT D F NEFFECTIVENESS O I RES AND THE TRUCTU S NCENTIVE I OMPETING C III.
C OMPENSATION
... ... ... ... ... ... ... ...
625 D IV.
EBT C OMPENSATION
V ERSUS P RUDENTIAL
M ONITORING .... ... ...
630 . ... ... ... ... .... ing tor Moni ial ent rud f P ts o Cos The A. 630 .... .... se erti Exp , and ity ual n Q matio for , In lems rob on P Acti tive lec Col 1. 631 . ... ... ... ... ... .... s ost cy C gen or A lat egu R 2. 633 ... ... ... .... n atio pens Com ebt d D s an ost cy C gen or A lat egu R B. 633 ... ... ... ... ... .... AY P EGULATING BY R ANGER OF D HE T V. 638 ... ... ... ... ... ... .... osts n C atio ens omp C A. 639 ... ... ... ... ... .... s ffect n E tio stitu Sub ved ercei P B.
640 C VI.
ONCLUSION .... ... ... ... ... ... ... ... .. 642
∗ P rof ess or of L aw an d A sso cia te Dea n o f R ese arc h a nd Fac ult y D eve lop men t, P
ace Pol gg Gre nd n, a kso Jac ob , R alle n G ria s, B lce A elli to K ks han . T aw f L ol o cho y S sit ver Uni
- . ents mm co ful elp or h sky f
I. INTR ODUC TION
As the ex plic it o r im plic it in surer of ban ks an d o the r s yste mati cal
- n has a ent nm over al g eder he f s, t ion itut l inst ncia fina tant mpor ly i obv ious int ere st in con stra ining the risk s tak en by th ose firm s. T
hat y p idit liqu sed rea f inc s o nefit be t the ins ff aga e o y trad ma est inter ro- fi- the ince st s t lea , a But s. risk ake o t ness t illing nks’ w y ba d b vide
nanc ial c ris is mad e the cos t of thes e gua ran ties m ore salie nt,
the stio que the ay to ven w s gi k ha ris ank uce b red to her whet n of stio que n y th tabl no most ls— osa rop e p Som k. ris nk e ba educ o r t how of e re- ital cap ed nhanc d e an 1 ng adi y tr tar rie rop ng p nni ba ule cker R Vol
quir em ent s 2 —w oul d al ter tr adit iona l prud ent ial m onit ori ng m ech
a- 3 s. ank n of b atio egul t r irec d d ase ncre ing in i esult s, r nism Para llel t o t hese , anot her set of p rop osa ls w ould in dir ect ly r egu
- es kag pac ion sat pen com rs’ nage k ma ban ring qui y re b risk bank late to inclu de som e lev el of un secur ed bank debt . 4 The ba sic no tio
n un- o b int ebt e d mor ing duc tro t in tha s is osal rop e p thes ng lyi der ank e t nsitiv e se mor ers anag ose m th ake d m oul w olios ortf s’ p ager man o rey to l p fal ly to ike s l e les efor her nd t a isks y r enc nsolv s’ i irm ir f the
the mor al h azar d un ique to b ank s. The se p
rop osa ls ha ve bee n ro
und- urc e p som ed ain e g hav to pear d ap an 5 s pres he in t auded appl ly has
e
1
. See
12 U .S. C. § 1851 (2012)
;
see also
Pre ss R ele ase , B oar d o f G ove rno rs o f t
he 10, ec. (D ule r R cke Vol ing ent em mpl s I ule l R ina e F ssu s I cie gen , A tem Sys rve ese l R era Fed 2013),
avai lab le at
ht tp: //w ww .fe der alr ese rve .go v/n ew sev ent s/p res s/b cre g/20131210a. htm
.
2.
See, e. g.
, P ete r C ont i-B rown ,
Ele ctiv e S har eho lder Lia bilit y
, 64 S TAN . L. R EV . 409
, ire equ al r apit r c ghe hi for ls cal ent rec and ts men ree ag asel B the ng ribi esc (d (2012) 425-28
- . ts) men
3. Reg ula tor y r esp ons es to exc ess ive ri sk-tak ing ar e n ot lim ite d to ba nks , a s n arr ow
- ties nti k e ban on- of n on ati ign des mits per Act ank -Fr Dodd he e, t anc nst or i . F ood rst nde ly u as s yste mic ally im por tant fin anc ial in sti tuti ons th at wou ld sub jec t su ch enti ties to p rud
en- -203, 111 No. . L. Pub ct, A ank -Fr odd D ks. r ban fo ved ser re lly ona diti tra on ati gul re tial § 113, 124 Stat
. 1376, 1398 (2010)
(co difi ed at 12 U .S. C. § 532 3 (2012) ). Whi le th ere
are nt w ste nsi co s is Thi er. geth s to IFI nd S ks a ban ups gro cle rti is A , th ces ren iffe tant d por im ith . que riti ed c tend ex his of t ect ubj e s re th at a ls th osa rop he p n in t ake ch t roa app the
4.
See
Lu cian A . B ebc huk & H olg er Spam ann,
Reg ulat ing B anke rs’ Pay
, 98 G EO .
L.J. & . ASH W , 69 n satio pen om e C tiv xecu E in tal api t C gen tin Con aal, A. K ulf ; W 247 (2010) L
EE
L. R EV . 1821 ( 2012); S
allie Kra wch eck ,
Fou r W ays to Fix Ban ks
, H ARV . B US . R EV ., J
une pen Com ve uti Exec ng cturi tru : S ance rform er Pe ank r B fo Pay , ung k T ric ede Fr 107; 2012, at
-e utiv Exec on, ord N. G ey ffr 2011); Je . 1205 ( EV R L. U. . W N , 105 n tio ula Reg Risk or on f sati Com pens atio n an d C orp orat e G ove rna nce in Fin anc ial Fir ms: Th e C ase fo r C onv ert
ible ork W es, tudi ic S nom Eco w & La for er ent , C aw of L ch. . S niv a U mbi olu (C Pay Based ty- Equi
-_ act str ?ab cfm rs. pape l3/ /so com rn. .ss pers //pa ttp: h le at lab avai 2010), o. 373, er N Pap ing id= 1633906;
see also
P ATRICK
B OLTON , H AMID M EHRAN & J OEL S HAPIRO , F EDERAL
R ESERVE B ANK OF N EW Y ORK , S TAFF R EPORT N O . 456, E XECUTIVE C OMPENSATION AND
R
ISK T
AKING 1 (2010) (su gge sti ng tyi ng ban k C EO pay to t he ban k’s c red it d efau lt s wap spr ead
). to ior aid pr as l s w sal propo on ati pens om bt c e de th for ork ndw rou l g ica ret heo he t f t h o Muc the cr isi s i n a pape r b y P rof esso rs E dman s a nd Liu .
See
A lex Edma ns & Qi Liu ,
Ins
ide . 2005) N in SR o S ed t ost and p ted raf t d irs 2011) (f . 75 ( IN F . EV R , 15 Debt
5.
See in fra
no tes 61 -62 an d ac com pany ing tex t.
amo ng ban k re gul ato rs 6 an d e ven ba nke rs thems elve s. 7 Th is Art
icle kin k-ta ris bank te gula re to move his of t sal prai al ap eptic sk rs a offe
g gn. esi ay d ing p lter by a
Hol ding all t hing s e qua l, a lte red co mpe nsatio n inc ent ives s houl
d th mize maxi r to rde n o k i ris ess n l ke o ta to ers anag k m d ban lea e n- s se ent rum t inst deb ude incl hen d t oul t w tha folio ort ir p f the e o valu
sitiv e t o s uch risk . B ut, to this p oint , t he d ebt c ompen sat ion pr
o- ted rea ives c incent ling vai nter cou h the wit pple gra lly ot fu do n als pos by ban k ex ecut ives ’ c are er c oncer ns. A s th e ma nage ria l la bor mark
et nsa ompe t c deb sed crea f in s o ate voc s, ad EO on C her toug ome bec has - add at e th rat onst dem to order r in o clea dle t hur her a hig n have tio - d ide rov ives p ent e inc th oth ct b era unt co will ebt of d mount me a ing so
by mang ers’ exi sting equit y ho lding s and tho se a ris ing o ut o f sim
ple . rns nce er co care
Reso lving thi s q ues tion la rge ly turn s on em pir ical q uest ions abo
ut ng lati egu er, r owev H 8 w. elo d b usse disc et r mark abo l l ria nage the ma risk -rel ated m oral haz ard at ba nks thr oug h a c om pens atio n cont rac
t cen- h in roug ng th ondi y. B heor in t ven d e ifie pec iss m hat omew s s seem tive pa y is tr adit iona lly se en as a s econ d-b est so lutio n, p rim ari ly
use- ltho A 9 igh. re h s a ost ing c itor mon l’s ipa rinc a p re s whe ase in c ful ugh ula reg for igh re h s a ost ng c ori onit t m tha ed sum as monly com it is tor
s s are ost se c tho her whet ar cle less is it 10 k, ris ank o b t t pec h res wit subst ant ially hig her t han t hose of b ank C EO s up on w hose man age
ri- ing dur ce ien per y ex tor ula reg he ly. T ls re osa rop y p pa the en acum al the fina ncia l cris is w as no t c hara cte riz ed b y p art icula rly hig h leve
ls
6.
See i nfra
no tes 47 -57 an d ac com pany ing te xt. T o m y k now ledg e, t hes e pa pers hav
e The , alle . G an D Bri s & lce A. A elli K See e. wic ly t on sm ici rit d c nde xte o e ed t ect ubj n s bee
Fal se Pro mis e of Risk -R educi ng Incen tiv e Pa y: E vid ence f rom Execu tiv e Pen sion s and
De- ards dw O. E las oug & D oto kam . O arl S 2012); K L. 53 ( . ORP C J. , 38 on sati pen om d C ferre
, ol- D. P gg Gre & und .W. L C ew ndr A so see al ; (2010) . 159 EV R L. ARDOZO C , 32 g akin k T Ris sky,
The D im ini shin g R eturn s of I ncen tiv e Pa y i n E xec uti ve C om pen sati on C ont ract s
, 8
7 ann am /Sp huk ebc d B an ung e T th that ng oti (n (2012) -11 , 708 . 677 EV R L. AME D OTRE N pro pos als ar e s ubj ect to cr iti cis m r ela ted to a b roa der ar gum ent abo ut the ef fic acy of in cen
- ti- cri fer rie s b on’ ord f G Jef ng ibi scr (de ext ng t nyi mpa cco d a an -73 s 71 ote n fra in ); pay tive cis m o f th e B ebc huk /Sp am ann pro pos al).
7.
See in fra
no tes 47 -56 an d ac com pany ing tex t.
8. See
in fra
P art I II, for mor e o n th ose em pir ics as w ell a s s tudi es a nal yzi ng th
e g. kin -ta isk m r fir on ebt e d sid f in ct o effe 9.
See , e. g.
, Joh n E . Cor e e t a l.,
Exec uti ve E qui ty C om pens atio n and I ncen tiv es:
A com rn. .ss pers //pa tp: ht le at lab avai 32, at 27, 2003, pr. ., A EV R Y ’ OL P . CON E Y , FRBN ey Surv
/ rs) cto ire f d d o boar he r t (o ers old areh sh , if sly iou Obv 806 (“ d=794 t_i trac m?abs .cf ers 3/pap sol cou ld di rec tly obs erve the fir m’s o ppor tun iti es a nd t he exe cut ive s’ a cti ons and kn ow
be- eq ing nclud s (i ive ent inc no th, eal w der hol hare e s miz axi d m oul w ions act hich nd w eha for ui- re i at a th ons acti ke to ta ve uti xec e e e th vat oti o m . T . . ry . ssa ece e n d b oul s) w tive cen ty in n e b tiv ecu ex the on sed mpo s i k i ris ion sat pen om , c ers old reh sha he f t ts o res nte t i bes the y is act ontr t c bes nd- eco e s th is, that e ( anc rm rfo pe irm o f th t eal s w ve’ uti xec e e g th kin lin use d).” ).
10.
See in fra
no tes 117 -21 an d ac com pany ing tex t.
of r egu lato r ig nor anc e o r b ank ob fusc atio n. 11 Mo reov er, and as other
s vely cti ffe to e ways ple im ly s tive ela e r may b ere th 12 ut, d o nte poi have low er the co sts of mon ito ring ba nk r isk. Fina lly, ba nk m ana ger
s’ ms. l fir cia inan rn f ode h in m ly hig ising surpr be ay s m ost ng c ori monit The mor e pow erfu l ca se f or reg ulat ing r isk by p ay is g rou nded
, rs lato egu R 13 . osts cy c agen ator egul of r iew ic v simist pes a in er, rath may n ot hav e t he w ill to r egul ate bank s as a no rm al c red itor mig
ht rgu to a ard d h dee is in , it vents nt e ece n r ive m. G fir her anot itor mon e he lves t ay so y p ion b ulat Reg l. dea re i es a tiv cen in ment rce nfo that e pro ble m b y r ely ing on mana ger s’ se lf-int ere st to re duce risk . Ho
wev- rtic pa any of nce dva in a ell ed w ment mple ay i y p n b latio egu er, r ular r age ato gul er re reat o g ct t ubje e s ly b like will king -ta isk bank r ncy o t ser t r clo occu hat on t ati gul re ante ex f s o rm er fo oth an ts th cos he gu- re t to pec res ith le w erab ref be p to er ord , in So ng. taki isk- f r t o poin lato r a genc y c ost s, a de bt com pens atio n pr opo sal w oul d ha ve to
limit iscre e d , th ever How n. atio ment s imple it ver n o tio iscre ry d lato regu - s tha one the ctly exa ls are posa n pro atio pens om t c deb ng duci -re tion t ives ent inc ger ana m bank al tim op lly cia e so hiev ac to likely ast le are bec ause th ere i s n o rea son to t hin k t hat , say , a ping a b ank ’s c apit
al effe the s, Thu ct. ntra co ing educ isk-r , r ient effic an ts se cture stru c- d a zar l ha ora m the to ion olut a s n as satio pen com bt de ss of ene tiv t . tion dop to a rior n p tai ncer t u leas e at ill b w banks
Nev erth eles s, i t may
be th at payi ng w ith deb t w oul d s im ply
be ere th so, If le. lab vai s a ool y t ator egul of r rray e a th l to nta eme incr migh t be lit tle ha rm in exp erim ent ing w ith deb t c om pen sati on
incen- nific insig ely ativ rel be to n out tur ely imat hey ult n if t eve s, tive ant
. om- ebt c of d on ucti rod he int hat t y t orr n to w easo re is r , the ever How pensa tio n in to the reg ula tor y t oolb ox m ight ca use reg ulato rs to rela
x en- comp ebt e d of th st ct, mo n fa s. I nism echa ing m itor mon ial dent pru satio n pro pos als spec ific ally m ake th is p oint ab out subst itut ing
indi- ly, ling roub e t mor ven E 14 . ion lat egu ct r ire r d on fo lati t regu rec mis- rrin ete ss at d ene ctiv ffe ’s e ion sat ompen t c deb ng ati valu nly e take g ay f p ion o imat est ver ical o stor hi h the wit ent sist con be ould w risk
struc tur e’s im pac t o n th e inc ent ives of corp ora te man ager s.
Par t II intro duc es t he o ft-n oted pr oblem of m oral haz ard in b ank
- is- ly d ief br n to es o t go es. I anti guar nt rnme f gove d o orl a w ven ing gi cus s t he t rad itio nal m etho ds of p rud ent ial b ank m onit ori ng, m any
of g t din rece rs p yea hs and ont he m d in t faile have to ear h app whic he
11.
See i nfr a
no tes 123 -28 and acc om pany ing tex t.
12.
E.g
., R obe rt P . B artl ett , III,
Mak ing Ban ks T ran spar ent
, 65 V AND . L. R EV
. 293 . (2012)
13.
See , e. g
., M . T odd H ende rso n & F rede ric k T ung ,
Pay for Reg ula tor Perf orm ance
, 2012). 1015-22 ( . 1003, EV R L. . AL C 85 S. 14.
See in fra
Par t II.
rece nt cri sis . F inal ly, it la ys o ut t he c olle ctio n of pr opo sals fo r in
di- gen en be ave at h n th atio pens om bt c h de hroug ion t ulat reg ank t b rec
- . ars ye our ast f e p ver th ted o era
Par t III call s for so me s kep tic ism re gar ding the abi lity to p rod
uce ’ pay gers mana ank h b wit ring inke y t cts b ffe ive e ent inc icant signif . I
t d- clu in rs, nage nk ma g ba cin s fa tive cen f in ge o ran ew the n es rib desc ing ev iden ce of a C EO ’s incre asing ly fr agile gra sp o n his or h er pos
i- e’s utiv xec he e ns in t itio ond e c anc orm erf y p quit it e implic he . T tion emp loyme nt a rra nge men t— one must famo usl y k eep dan cing w
hile ct effe ing mpen -da risk any nter cou t to e ap —ar 15 ays pl sic the mu of es. f cas ity o jor e ma in th on ati ens t comp deb
Par t IV off ers a sep arat e a rgu ment aga ins t usi ng a bo nding m
ech- s ho how t s . I king -ta risk rm fix fi n to satio pen com ebt e d sm lik ani w on ati pens com via ing ond ) b (1 osing cho for ary cess s ne ion dit con the
con trac t ove r ( 2) dire ct prude nti al mon itor ing ar e not ob viou sly m
et regu xtent e e o th s. T ank n of b atio egul al r ent rnm ove of g case in the -t , i ing itor mon ial dent pru nal, itio rad to t le erab ref is p ay p n by latio
must b e b ecau se of hig h re gul ato r a genc y c ost s— that i s to sa y, r egu
- y n the atio orm inf the use fully rce fo s to tive cen in ave ot h y n rs ma lato obt ain. H owev er, r egul ator age ncy cos ts a re l ike ly t o pr ove a s p rob
- al tion adi r tr o fo ey d y as th pa n by tio egula or r so, f re not mo , if atic lem pru dent ial r egul atio n.
Par t V sugge sts that t he mo ve to
reg ula tin g ban k r isk thr oug
h ally ctu may a It ful. help un ust n j tha ore e m to b out urn ay t pay m even by tted admi as ee, egr a d to oring onit ial m dent pru lace disp the m ost sob er p rop onen ts. A par t f rom tho se a dm issio ns, P art V
ated tim eres n ov fte ve o lars ha cho d s s an tor egula r how es rib desc the l eve l o f in cen tive effe cts occ asi one d b y t inker ing w ith p ay. G ive
n his in in t aga o so ay d y m the hink o t son t is rea ere th ry, isto that h new co nte xt, p erver sel y lea din g t o a mor e rel axed m onit orin g r egim
e . ore bef than
II. THE
DEBT C OM PEN SA TIO N PRO POSA LS
It i s wid ely be liev ed th at b ank s t ook on h igh le vels of risk in th
e w, elo d b usse s disc A 16 –2009. 008 f 2 isis o l cr cia inan e f to th -up lead 15.
See
M ich iyo N aka mot o & Dav id Wig hto n,
Citi gro up C hief Sta ys B ullis h on B
uy- c-821c 50-11d -2e 80e2987a s/0/ ms/ tl/c m/in .co .ft ww ://w ttp , h , 2007) ly 9 (Ju IMES T . IN , F Outs
-s ing , th dity qui f li s o term , in tops c s usi e m th hen “W 8d ( BW Z3T zz2s ml#ax .ht 0000779fd2ac will be c om plic ate d. B ut a s l ong as th e m usi c i s p lay ing , y ou’ ve g ot to get u p a nd d anc
e. . .”) ing anc till d re s We’
16. Am ong thos e w ho sha re th is vie w, th ere is s om e d isa gre em ent ove r w hat c oun ts a
s huk Bebc ce, tan ins For 204. 6, at te no supra , ards Edw & oto kam , O e.g. See, sk. ri ve” essi “exc and Spa man n d efin e i t as n ega tive -va lue “bets ” that a re n eve rth ele ss p riv ate ly o pti mal
. e” siv ces “ex of tion ini def t a tric oo s be t may his . T t 255 , a te 4 no a supr ann, pam & S huk Bebc fro m t he poi nt o f v iew of cre dit ors , w ho may ev en obj ect to pos iti ve val ue bet s t hat ar e p
ar- . tile ola ly v lar ticu
bank s are su bje ct t o a pa rtic ular so rt o f m ora l ha zar d o cca sione d b
y ht houg uch t . M ies rant l gua era h fed hroug sses t lo n of atio aliz soci the has g one int o so lving the pro ble m o f ban k m ora l ha zar d, c ulm ina
ting ing mo y add ay b ’ p gers ana nk m ba djust o a ls t osa rop f p es o eri in a s re ow bel led tai de are als opos e pr hos . T olio ortf r p thei ebt to k d ban , ore etof her have hat ry t ntra he co o t ces t voi of ndful he ha e t ngsid alo been ra ise d.
A. B ank Mora l H aza rd a nd D irect Reg ula tory Resp onses
Bank mana ger s ha d s ubst ant ial r easo ns to p
ref er exces siv e ris
k ere s w ger ana se m Tho 17 7. 200 ore bef -up run the ing dur ity latil vo and app oint ed by b oar ds answ era ble to sha reh old ers a nd, in fac t, w
ere equ ical stor f hi e o irtu y v es b selv hem s t lder reho sha icant signif ity disc et ark m bor h la oug thr her het W ts. emen ang arr ion sat pen com i- n- eof, ma ther ion nat ombi a c g, or din bon ated -rel ion sat ompen e, c plin age rs int ern aliz ed equi ty p ref eren ce f or i ncr eased ris k. 18 P re-c ris
is r in- n othe ms i fir from nt ere diff ry t ve e no wer rd, ega his r s, in t bank dus tri es, w ith bot h sh ifting the p ref eren ces of ris k-a vers e ma nage
rs 19 ers. hold hare d s sifie iver , d eking isk-se e of r thos rd towa Alt houg h bank mana ger s wer e e xpo sed t o t he sa me so rt o f in
cen- ly lik ique re un we nks , ba ies ustr r ind the se in o s tho ng a ifti e sh tiv ely ss highly y le ead alr are anks on-b . N risk els of lev her hig ake on to t lev ered th an ba nks , lo wer ing t he app licab le r isk b ase line . 20 Mo
re im- orin onit -m oss o cr ct t ubje ly s ral ene e g s ar bank on- y, n tantl por g b
y itor red ave c s h ank B 21 g. kin k-ta ris ins tra ons n c ofte at s th tor credi s edi- cr bank but ks— ban ial erc mm at co rs sito epo e, d anc inst for too—
tors o ften hav e lit tle rea son t o i ncur monit ori ng c ost s b ecau se t
he ran- gua ent ernm gov cit xpli e it or plic to im ct ubje e s s ar debt bank ties . 22 T he gove rnm ent, in e ffec t, s tan ds in as th e rel evan t c redi tor t
o eir d th orme erf ve p ha ar to ppe rs a lato regu nt rnme ove t g , bu banks 17. Sim ple hu man er ror als o p lay ed a par t in the e xce ssi ve ris k-ta kin g th at h elp
ed A. ose & J , ong on H ris Har ng, Che Haw Ing- ee S is. ris al c nci ina ent f rec e se th cau Sche ink man,
Yest erday ’s Her oes : C om pen satio n a nd Crea tiv e R isk -T akin g
(N at’l Bur eau
of . 16176, 2010) No. er Pap ing ork h, W arc ese n. R Eco 18.
See
Tung ,
supr a
no te 4, at 1206 -07.
19.
Id.
at 1214-18.
20.
See , e. g.
, Oka mot o & Edw ards ,
supra
n ote 6 , at 168 (“A
ll ban ks e ngag e i n s om
e arn t e tha ets ass re qui ac to der or y in one m ing ow orr es b olv inv at ’ th ade y tr arr e ‘c f th m o for a po sit ive ‘spr ead’ —or the diff ere nce bet wee n t he c ost of s hor t t erm cap ita l a nd t he p rof
it ard rew ade y tr arr e c at th od th rsto nde ly u ral ene t is g g. I din len rm er te ong by l ted era gen s t.” men est inv any or rn f etu ted r expec he es t plifi e am rag eve use l eca ns b sio deci isk h-r hig (fo otn ote s o mit ted )).
21. Tung ,
supra
no te 4, at 1206.
22.
See i d.
monit ori ng t ask po orly dur ing the pre -cri sis peri od. 23 T he con tou
rs of , bu low I be II art in P ail det ter rea g d in usse disc re e a ailur t f tha t he mp t pu d to ile fa ment vern e go th hat d t erve obs have tors nta comme brak es as b ank m ana ger ri sk pref eren ces w ere shi fted to war d th
ose 24 rs. lde reho sha heir of t
Sinc e t he c risi s, v ario us le gisla tiv e a nd r egu lato ry atte mpts hav
e i- stor ith hi w ent onsist C ks. ban g at kin k-ta ris pen am e to d mad been cal prud ent ial m onit orin g, m any of t hese ap pro ache s i nvolv e d irec
t ct nk A Fra odd- D the e, stanc or in . F ior hav ’ be anks of b ght rsi ove inclu ded a non -sp eci fic ma nda
te to ban pr opr ieta ry tr adi ng b
y of ion ers nal v a fi d in ifie cod en s be ha ate and t m tha tly ecen R 25 . banks the V olck er R ule. 26 E lsew her e, r egu lato rs and a cad em ics ar e p
ursu- cus a ate d cre oul t w s tha ent irem equ al r apit ed c nhanc ing e hion
lly ina F 27 y. lvenc nk inso ba of isk he r e t duc re s to o a e s ilur f fa se o in ca and mor e mod estl y, so me ha ve sug gest ed way s to sim ply str ength
en, mine exa bank sting exi the , nging cha ally ent am fund hout wit r
28 e. im ng reg itori mon
23.
See gen era lly
P atr ici a A . M cC oy et al.,
Syst emic R isk Th roug h S ecur iti zat ion : T
he he g t lin etai (d (2009) . 1327 EV R L. . ONN C , 41 re ailu y F tor ula Reg nd n a latio egu Der of ult Res
var iou s m iss tep s o f r egu lato rs d uri ng th e p eri od l ead ing up to th e fi nan cia l c ris is) .
24. Alc es & Gal le,
supra
n ote 6 , at 53-5 4 ( sta ting that a con trib uti ng f acto r t o th
e based ve- nti nce gh i rou rs th lde eho har nd s s a ger ana f m ent o nm lig e a th was sis cri ial anc fin pay) ; T ung,
supra
no te 4, at 1222-2 3 ( noti ng t hat p rio r t o th e f ina nci al c ris is, ban ker s’ i
n- om o c h t oac appr ing miz axi th-m eal r-w lde eho har rd s nda sta the o “ r t ila sim ere es w tiv cen - k ris st ain ag ard gu to led fai rs ato gul re ank d b ” an ies ustr ind ted ula reg un d in use on sati pen tak ing ); D avi d I. Wal ker ,
The Cha lleng e o f Im pro vin g t he Lon g-T erm Focu s of Exec uti
ve it a on, cti e a ittl ut l ic b tor rhe uch f m s o ear r y fte (“A 2010) 435, 436 ( . EV R L. B.C. , 51 Pay
p- ex- ase cre o in s t tep l s gfu nin mea ake o t ed t ois be p may ent rnm ove l g era fed the hat rs t pea ecu tive com pen sati on r egu lati on. ”).
25. Dodd -Fr ank Wal l S tre et R efo rm and Con sum er P rot ect ion Act (D odd -Fra nk A
ct), 1851 C. § .S. 12 U d at ifie cod 2010) ( -31 ( , 1620 . 1376 tat 124 S § 619, -203, o. 111 L. N Pub. (20 12) ). T he s tat ute lea ves the co nto urs of the ru le t o t he rul em aki ng p roc ess , w hic h i
s Jo ew Scr t “ Don’ c, awie . Kr ly D ber Kim See . que riti e c oic ch blic pu ing ath sc o a e t tibl cep sus
e re- . Mo (2013) . 53 EV R L. . RIZ A , 55 rm efo ial R anc f Fin ing o Mak ge- ausa he S : T er” mm Plu the
ove r, a Vol cke r R ule tha t is abl e t o u sef ully red uce ban k r isk -ta kin g m ust d isti ngu ish
be- ark d m an ing edg e h lik ves ati tern al bin -ca t-to cul iffi d d an ing trad ry eta pri pro ue n tr twee et- ECOMMENDATIONS ON R & TUDY S , OUNCIL C VERSIGHT O TABILITY S . IN F See ng. maki
P ROHIBITIONS ON
P ROPRIETARY
T RADING & C ERTAIN R ELATIONS HIPS WITH
H EDGE F UNDS
& 2011). 16 ( UNDS F QUITY E RIVATE P
26. 12 U.S .C . § 1851.
27.
See, e.g.
, Co nti -B rown ,
supr a
n ote 2, at 425-26 ( dis cus sin g B asel III’s i ncr eas e i
n s in yth nd M s, a act t F evan rrel es, I laci Fal ., t al ati e dm R. A nat ; A ts) men ire equ al r apit bank c
the D isc uss ion of Cap ital Reg ula tio n: W hy Ban k E quit y I s N ot Soc ially E xpe nsiv e
57 (R
ock lab avai , 2013) 161, No. er Pap ing ork ., W niv d U for Stan at ce rnan ove e G orat orp r C fo Ctr.
le her hig en ev for g lin (cal d=2349739 t_i trac m?abs .cf ers pap ol3/ m/s .co srn s.s aper ://p ttp h at
cap ital requ ire men ts t han Bas el III) .
28.
See , e. g.
, H end ers on & T ung,
supra
no te 13 (c alli ng f or a n in cen tive pay reg im e fo
r n A ge: tra rbi A ory lat egu e R ers Rev g, Tun ck eri red & F on ers end H odd . T ; M rs) ine xam k e ban
Auc tio n A ppr oac h to Reg ulat ory Ass ign ment s
, 98 I OWA L. R EV . 18 95 (2013) (cal lin g fo r ban
k r, dle pin . S es C am & J on ers end H odd . T ); M ine am ex will ey s th rm e fi t th lec se to ers min exa Why Ban k R egu lat ion Fai led . . . and W ill P robabl y C ont inu e t o F ail ( 2012) ( unp ubl ish ed
More ind ire ct ro ute s t o re duce risk ha ve als o b een sug gest
ed. T
he risk all a inst rds boa ms’ l fir ncia fina at d th date man Act nk -Fra Dodd mana geme nt commi ttee
com pri sed of in dep end ent dir ecto rs. 29 T
he nti ude pr of ork e w th e of som do ly cal eti eor d th oul ttee w commi al , an ely nativ lter A 30 rs. lato y regu d b orme erf lly p ona iti trad ing tor moni
enha nced dis clos ure regi me mi ght p ermi t m arke t p art icip ant
s to prim nts, ipa rtic pa ket mar ose Th 31 . risk ank ce b pri vely cti effe more ar- tra ment ple om ly c lpful he ight m 32 s, der thol deb ated din ubor ily s di- e. egim h a r suc der n un tio egula nal r tio
B. Pay ing with Debt
The m ost
pro min ent p rop osals f or i ndi rect re gula tio n, ho wev
er, sa- pen com er anag ank m g b rin alte g by kin k-ta ris bank pe sha to seek tio n. U nder thes e prop osal s, b ank m anag ers su pplie d w ith ne wly
cal- plem om s c ve a ser es selv hem d t oul s w ive ent inc lio ortfo p ated ibr en- ent inc asic he b of t sion ten an ex ea is id The 33 rs. nito k mo ban tary ive vern ny go mpa ic co ubl te p ina om to d come has hat k t wor rame pay f - ith n w tio situa sent pre the like Un 34 es. ecad ree d th ast he p er t ov ance bank s, g ove rna nce ac tiv ists’ prim ary co ncer n w as tha t e ntre nche
d in ted ves l in ita cap an ic hum ecif -sp t firm can gnifi si ving s, ha ger mana thei r job s, t ook
too littl e r isk
, ca usi ng v alu abl e pr ojec ts t o be a voi
ded s as rve se pay ased e-b anc orm erf P 35 . fer o suf ns t tio alua m v fir and a ser to ob icult diff ely ativ rel is it here w ions uat e in sit evic g d din bon ve
man usc rip t) ( on f ile wit h a uth or) (ar gui ng t o s tren gth en th e r egu lato ry v eto hel d b y b
ank e T. aul S also see ; rs) ine xam k e ban of ces evi t d men mit com pre ing and exp by ers min exa Om arov a,
Lic ens e t o D eal : M andat ory Appr oval of C om plex Fin anci al P rod uct s
, 90 W ASH
. ic tem sys of lem rob he p to t ons uti sol f “ s o ple xam g e tin lec col 2) ( 201 2 ( 81-8 . 63, EV R L. U. ris k c aus ed by i ncr eas ing co mpl exi ty o f fi nan cia l p rod ucts and m ark ets ”).
29. Dodd -Fr ank A ct § 165( h), 124 S tat . at 1429-30 ( cod ifie d at 12 U .S. C. § 5365(h)
). cial inan k f -ban non lic pub and ies pan om g c din hol ank ic b ubl ll p or a s f ent i rem qui re The hold ing com pan ies sup erv ise d b y th e F ede ral Res erv e w ith ass ets of te n b illi on d olla rs
or Id. r. ate gre
30.
See
K ris tin N . J ohns on,
Addr ess ing Gap s i n the Dodd -Fra nk A ct: D irec tors ’ R
isk re a The 1). (201 -07 106 55, EFORM R J.L. . ICH M U. , 45 ns atio blig ht O sig ver O ent gem Mana
re ce i man for per irm e f hap to s ors ect dir ide outs on ing ely nst r gai ts a men rgu al a nti sta sub n t- Do Ou au, onl Sch rt obe R & und . L .W C ew ndr f, A dof avi M. D en tev , S g. , e. See xt. nte co this
side Dir ecto rs Fa ce La bor Mark et C onseq uen ces? A N atu ral E xpe rim ent fr om th e F inan
cial . g 2014) min hco ort . (f EV R L. . US B . ARV H , 4 is Cris
31.
See
B artl ett,
supra
no te 12.
32.
Id.
at 305.
33. Whe ther the man age rs w oul d b e c om ple men tary or sub sti tute re gul ato rs i s d
is- . t IV Par a infr sed cus
34. For ano the r rece nt sum mary of exe cuti ve-com pen sat ion -as -go ver nan ce o ver
the 56-59. 6, at te no supra le, Gal es & Alc see rs, yea 35.
See
B ria n J . H all,
Six C halle nge s in D esig nin g E qui ty-Bas ed Pay
, J. A PPLIED
C ORP . F IN ., Spr ing 200 3, a t 2 1, 2 9 (“ One of the m ost com mon ly a lle ged ben efit s o f o pti ons
is . .”) isk to r ion ers av ral atu s’ n ger ana e m com ver p o hel they that
man ager s’ be hav ior , 36 w her e sh areh older s d o no t ha ve the abilit y o
r rm t fi affec ons isi dec ve uti e exec wher or 37 , ante ex r nito t to mo res inte per cent age ret urns r ath er t han dol lar ret urns. 38 D ete rmi nin g the e
f- er- tink ion sat mpen co ort of s s thi to able ibut ttr r a vio eha m b n fir t o fec ing ha s pro ven to be an e cono met ric ally diff icult tric k, 39 an d th ere a
re ruc on st sati pen om d c rve bse r o hethe r w s ove ate deb ning -run long - ever N 40 er. ow ial p ger ana r m ing o gain bar ngth s-le rm’ ct a efle s r ture - vels y le heav n of uctio rod int the at d th lieve be arly opul is p it less, the
of p erf orm ance -ba sed pay ca used in cre ase d r isk-tak ing ec onom y-w
ide 41 . ades dec ent rec over
In the lig ht o f t hat suc cess, som e co mment
ato rs turn ed to m
ana- ard di nw dow in a now ust ( adj to pt ttem r a thei n in esig ay d ial p ger - the fi or to pri ven ct, e n fa s. I risi t-c s pos ank t b ing a tak sk- ) ri ion rect - to nning egi e b wer lars scho ing, bank rom rt f apa nd is a ris ial c nanc
mod el t he u se o f d ebt com pens atio n’s r ela tio n to f irm risk -ta kin g. 42
ion duct a re for call ght mi roach app h an suc t form, des st mo ts mo In i in eq uit y c om pens atio n for mana ger s 43 an d/or lo nger hold ing per
iods osal rop e p som , ever how ly, ious bit am ore M 44 es. tak ity s equ for s
36. For m ore on th e q ues tio n of ob ser vab ilit y, s ee Ben gt H olm str öm,
Mor al H azar d an
d ). ple nci ” pri ess ven ati rm nfo is “i ng h uci trod (in 79) (19 . 74 CON E J. ELL B , 10 y abilit erv Obs
37.
See
K evi n J. Mur phy,
Exe cutiv e C om pen satio n
,
in
3 H ANDBOOK OF
L ABOR
E CONOMICS
2485, 2521 (O . A she nfe lte r & D . C ard eds ., 1999) (“In ge ner al, inc reas
ing eas ncr , i ects proj ue val nt ese pr net tive osi n p ng i sti nve s i lve nvo th i eal er w old reh sha ing e p alu ent v res et p ve n ati neg rom es f urc eso ng r rti ive nd d tal, a api ng c sti exi on fits pro ro- th ing efin g d din clu in ue, val er old reh sha ct affe at th ons cti f a y o rra e a wid a is ere Th ts. jec e e- nd r d a den ivi ng d aki , m ing anc fin uity eq t and deb een etw sing b hoo , c tegy s stra nes busi
pur cha se dec isi ons , id enti fyi ng acq uis iti on and di ves titu re targ ets , s ele cti ng ind ustr ies an
d l- eve r d fo gets bud ng etti ts, s uni ss ine bus ss cro l a ita cap ng cati allo it, ex or ter en to kets mar opi ng n ew produ cts and bus ine sse s, hi ring pro duc tiv e ( and fir ing unpro duc tiv e) s ubor
di- lic exp t and ici mpl f i s o exu e n ng th ini nta mai nd , a ting men ple im ng, gni esi nd d s, a nate it ct ffe that a ons cti al a nti ote f p et o the s ing and Exp on. ati niz rga e o es th efin that d cts tra con sha reho lde r v alu e d im ini she s t he r ole for ‘in for mat ive nes s’ a nd i ncr eas es t he b ene fit
of . ts.”) npu of i es sur mea an to th ther ra ive ect obj al’s cip rin e p to th ay g p tyin 38.
See
G eor ge P. B aker & B rian J. H all,
CE O I ncent ive s a nd Fi rm Si ze
, 22 J. L ABOR
E CON . 767, 778 (2004) .
39.
See
L und & Pol sky ,
supra
n ote 6, at 705 & n.121 ( not ing that end oge nei ty p ose
s . ta) on da ati pens om m c fro ces eren inf sal cau ing aw r dr s fo em obl s pr iou ser ly lar icu part 40.
See id.
at 711 -15 (su mm ariz ing th e d ebat e). For a tast e o f th e m ain po ints of di
sa- T : ERFORMANCE P ITHOUT W AY , P RIED F ESSE J & EBCHUK B UCIAN L pare om t, c emen gre HE
U NFULFILLED
P ROMISE OF
E XECUTIVE C OMPENSATION (2004
) (s ugg est ing m anag eri al p ow
er neffi- ion I sat pen Com EO C .S. Is U l., et a ore . C n E Joh ith , w es) oic ch ion sat pen com ves dri
cien t P ay W ith out Pe rfor man ce?
, 103 M ICH . L. R EV . 1142 ( 2005) (
ques tio nin g t he B ebc
huk unt). cco ed a Fri and
41.
See, e. g.
, K ENNETH
R. F RENCH ET AL
., T HE S QUAM L AKE R EPORT : F IXING THE
F INANCIAL
S YSTEM 47 (2010) (“ The
stru ctu re
of e xec uti ve com pens ati on, how eve r, c an a ffe
ct 1206. 4, at te no a supr ung ; T .”) ons tuti nsti al i nci ina tant f por im lly ica em yst f s k o ris the 42.
See
E dma ns & L iu,
supr a
not e 4 ; Y air Lis toki n,
Pay ing fo r P erf orm ance i n B ank
- 2007). . 777 ( EV R L. . A P U. , 155 ebt D with sated pen om be C uld Sho Os CE hy W cy: rupt
43.
See
A lce s & G alle ,
supra
no te 6, at 54 & n .3.
44.
See, e.g.
, L uci an A . B ebch uk & J ess e M . F ried ,
Pay ing fo r L ong -Ter m P erform anc e
, e utiv xec ing E rm Refo ano, om a R ert Rob at & Bhag anjai 2010); S . 1915 ( EV R L. . A P 158 U.
sugge st a lter ing the pa y st ruc tur e o f b ank mana ger s so as to incl
ude age man ond b ould w ebt is d Th 45 . debt bank ls of leve icant signif rs o it ed t ppos s o r a othe an t or e exten to on rs ito cred ank’s e b to th
s s. lder ityho equ
The inc lusi on o f b ank de bt in pay pa cka ges w oul d b e ne w b ut no
t e som old y h read al ers anag k m ban ost . M ent ced pre hout wit irely ent sor t of ins ide deb t. Many are ent itle d t o unf und ed f utur e d efe rre
d bt s de n a tio y func vel ecti eff that ts you pa sion pen and ion sat pen com cla ims on the fi rm. 46 In a m ore m und ane sen se, fut ure c ompen sat
ion t-li deb of rt so the ctly exa sk— ri dit cre firm to ect ubj re s s a am stre ke fir n the ay i y p quit d e nce nha or e ush f he p o t d t t le tha est inter st st- exi ese d th yon o be er, g owev , h ow bel sed iscus ls d posa pro The ce. pla
ing pra ctice s a nd ca ll f or t he inclu sio n of actu al or pha ntom debt sec
u- . ies pan com ng oldi k h t ban aren r p thei or ks ban by sued be is s to ritie
1. The P ropo sals
At abo ut the same ti me, Luc ian B ebc huk and H olg er Spa mann,
on ebt ing d add sed opo pr her, ot n the ng, o Tu Fred nd d, a han one the to pro rd aza al h mor the ate ior mel to a order in es ackag ay p rs’ p banke b- sib pos of ber um a n ed gest sug ann pam nd S huk a ebc s. B bank at lem le heir is t on ttenti st a e mo d th eive rec t has tha one t the bu 47 es, tur struc
“pay -by -th e-s lic e ap pro ach” th at wou ld tie bank man ager co mpe
nsa- cap y’s pan om ing c hold ank he b s in t itie cur se et of ire s e ent to th tion i- ep- exc ble ota two n with lar imi as s ach w pro g’s ap Tun e. tur struc tal
tio ns t hat seem to mar k imp rove ments . F irst , Tu ng wou ld u se s ubo
r- ny mpa co lding k ho ban ior o sen ed t pos as op ebt el d k-lev d ban ate din deb t i n or der to can cel ou t p oten tia l n ois e cre ated by n on-b ank
seg-Com pens atio n: F ocus ing and C om mitt ing to the Long -Te rm
, 26 Y ALE J. ON R EG . 359,
361 . (2009)
45.
See g ener ally
B ebc huk & S pam ann,
supra
no te 4 ; Tun g,
supra
no te 4.
46.
See
Lu cian A. B ebc huk & R obe rt J. Jack son , Jr .,
Execu tiv e Pen sion s
, 30 J. C ORP .
L. nd t a Deb side In ter: e La M Pay ack, erm Y L. avid D & aram und . S K ajan angar ; R 823 (2005)
Its Rol e in M ana geri al C ompe nsat ion
, 62 J. F IN . 1551 (2007) ;
but se e
R obe rt J. Jac kso n, J
r. EV R L. . A V , 100 ay ent P em etir ve R uti xec f E re o atu en N idd The H , erg gsb oni en H olle & C . e ric e p har to s ve iti ens is s ebt e d sid ’ in ves cuti exe of uch at m g th din fin 4) ( 201 ing com rth (fo
flu ctu ati ons and, in a ny e ven t, i s pa yab le i mm edi ate ly upo n de part ure fr om th e fi rm ).
47. The ir alte rna tive s in clu de: (1) ty ing com pen sati on t o th e v alu e o f th e b ank ho ldi
ng 200 he of t rt pa as ent rnm ove e g th to ued iss ck sto ed err ref d p an ock st mon com y’s pan com 8 yin ) t (3 ts; men rse sbu t di lou bai for ted djus ch a pproa e a lic he-s by-t ay- the p 2) ; ( uts bailo g s, are sh mon com ’s ny] mpa co ing old [h ank he b f t e o alu e v gat gre ag the “to ion sat pen com
pre fer red sha res , a nd b ond s a t t he s pec ifie d t im e m inu s t he exp ect ed v alu e o f f utu re
gov- t in- aul def of ility bab pro ied mpl e i i) th of ( uct rod e p by th ied rox s p ts a men t pay men ern fer red fro m th e p ric e o f c red it d efa ult s wap s a t the s pec ifie d ti me a nd ( ii) t he v alu e o f th
e ch a es su sur mea to “ ion sat pen om s c onu g b tyin (4) and ;]” me[ at ti at th sits epo k’s d ban s 4, ote n supra n, man Spa & huk ebc ” B rs. olde ondh to b ade s m ent ym ny pa re a efo gs b nin ear at 283 -85.
ment s wit hin t he ho ldin g c om pany st ruc tur e. 48 Se con d, Tung w
ould d t roun he g on t es tur struc al apit s’ c ank b imic m rily ssa ece not n hat A eous. ogen eter y h ikel re l s a nce ere ref isk p s’ r ger l mana idua indiv c- ruc al st pit ca ping map hat e t sum to as son rea no e is her ly, t ding cor - ular tic par n any alig ely iat opr ppr d a woul re uctu str pay to on ture
man ager ’s incent ives. 49 Inst ead , b oard s s hou ld at tem pt to c alibr
ate bas pay er’s ank r b icula art ny p r a s fo itie cur of se et ask al b ptim an o ed ras sync s idio Thi 50 ics. rist cte hara ive c cut exe and ank b ific pec on s y oul s w es a lin uide r g ules o y r pa ate and ly m ect dir y to abilit s the limit d x- s an e er, a owev H 51 . roach app lice e-s by-th ay- a p under le ailab be av
am ple of it s po tent ial w ork abil ity, Tu ng sug gest ed that dep osit
in- sat pen om y c an for ount acc to red ailo e t ht b s mig ium rem e p suranc
ion 52 k. ban he by t opted ad cture stru
In a simila
r v ein, W ulf K aal ha s re cent ly sug ges ted add ing a n u
n- ives’ cut exe ank to b nds bo ible ert conv ingent ont f c nt o mou d a ifie spec pay pac kag es. 53 T his d ebt woul d f uncti on s imi lar ly to the
deb t d
e- quit to e ert onv d c oul ut w ung, b nd T n, a aman , Sp huk Bebc d by ibe scr y a- erior det it cred d of hol res e th tiv e objec som g of rin igge he tr n t upo
tio n. 54 F or s igna ling pur pose s, K aal w oul d se t t his tr igge rin g thr esh
- 55 et. ark o the m old t t s deb le tib ver con in used hat an t er th low old Jeff G ord on a lso sugge sts a dding a d ebt -lik e p ay e leme nt fo
r e o posit op s the ion i gest s sug on’ ord er, G owev , h nse a se In 56 rs. banke f e- uity s eq t and f deb x o a mi via aying lly p nitia han i r t the Ra ’s. Kaal
cur itie s, G ord on wou ld allo w b ank s to co nti nue p aying m anag ers
48. Tung ,
supra
n ote 4 , at 1231-35, 1236 & n. 165. A ddi tio nal ly, m arke t d isc ipl
ine od iho kel r li ate gre he of t se cau be debt ed nat rdi ubo el s -lev ank r b y fo kel e li mor be ht mig for . -34 at 1231 Id. es. riti ecu ebt s al d tion ddi f a e o anc ssu ic i iod per
49.
Id.
at 1248.
50.
Id
. F or ban ks, th e d esi gne r w oul d c ons ide r le ver age , c api tal st ruc tur e, i nve stm
ent ank nt b eva rel the of cts effe in erta nd c , a isk ult r efa e, d tur truc p s shi ner ow es, niti ortu opp hold ing str uctur e.
Id.
at 1248 & n
.210 ( col lec tin g au tho rit ies ). F or man ager s, t he d esi gne
r nd de s a ion pens ally ner t (ge deb ide ins ting xis g e din clu , in ios tfol por eir r th ide ons ld c wou
- . at 1248 Id. ). tion pensa om red c fer
51. Thi s is lik ely a str ong po int in fav or of B ebc huk & Sp am ann ’s app roa ch.
See in
fra . .B t IV Par
52.
See
Tung ,
supr a
no te 4, at 1249 -50.
53.
See
K aal,
supra
no te 4, at 1854.
54.
Id.
at 1855-59.
55.
See i d.
at 1869-72.
56.
See
Gor don ,
supra
n ote 4, at 11. Impo rtan tly , G ord on d epar ts f rom the Beb chu
k- tant por im lly ica tem sys at ers old areh sh hat g t min assu by hes oac appr ung d T ann an Spam fin anc ial ins titu tion s m ay i nte rna liz e t he c osts of exc ess ive ri sk-taki ng to a deg ree no
t re rs a lde eho har l s ona tuti nsti e i aus bec on, ord es G rgu o, a is s his d. T ate cip anti ise erw oth not ab le to dive rsi fy aw ay system ic risk th at exc essi ve ban k-s pec ific ri sk mig ht pos e.
Id.
at tion adi e tr th uch o m ot s s n e, i for ere th ks, t ban g a kin k-ta ris ive ess exc of lem rob he p . T 2-4 al d b ace s f tive cen r in ula tic par of tion lec ref t is a as i uch s m e a arg rit l de w ivi bt d /de ity equ y in ed est inv th eal w eir f th h o muc ng avi d, h fie rsi ive y d ntl cie effi not are ho s w ager man bank
a p arti cul ar ban k’s e qui ty s ecu riti es.
Id.
with eq uit y. Tha t eq uit y, h owev er, w ould be sub jec t t o con ver sio
n rs— igge n tr tai cer pon ) u cut hair h a wit t ( deb ed inat ord sub into reg ulat ory do wng rad es, dr ops in key
acc ount ing met ric s, a nd, per
- nger stro ides rov y p arl cle roach app his T 57 ces. pri are in sh ops dr haps, incent ives t o a voi d e xce ssive r isk —at le ast as insolv enc y b eco
mes aal’ ly K tain cer s (and ann’ pam nd S huk a ebc n B —tha ely e lik mor s) nally itio ond e c d b oul io w fol ort e p ntir ’s e ger ana m nce a , si osal prop
deb t-li ke. 58
Fin ally , Salli
e Krawc hec k, f orme rly o f Ban
k o f A meri ca
and h she whic in -ed w op evie iness R Bus ard arv H d a enne up, p igro Cit joi ned th e ca ll for rec onfig uri ng ban ker pa y t o in clu de deb t. 59 W
hile bt ty and de qui of e on ati bin om ary c ess nec t the bou l a itta comm non in nd al e gic lo ost he m t “t tha ed not ck che raw e, K kag pac mal pti an o poi nt w ould be a com pensa tio n m ix t hat mir ror s the ba nk’s cap
ital h is oac ppr r a ut, he d o pelle ot s re n ls a etai the d ugh Tho 60 .” cture stru rem ini scen t of B ebc huk a nd Sp aman n’s pay-by-th e-s lic e a ppro ach
. cele en s be ha icle art ’s eck wch Kra ,” ider ins er “ orm a f from ing Com - Her e. nanc ver go n bank h i oug kthr rea a b of hing met as so ted bra com pen sati on so lutio n wa s p osit ively no ted by va rio us p ress o utle
ts, 61
and a New Yor k T imes colu mnist wr ote th at t he d ebt c omp ens ati
on 62 . icle s art ck’ che raw ion in K solut ite” vor is “fa as h w osal prop 57.
Id.
at 11.
58. Tun g’s pr opo sal , m ode st a s it is reg ardi ng t he a ppropr iat e mix of de bt a nd e qui
ty on’ ord o G r t ila sim thus and avy -he ebt e d o b s t so a red ctu tru e s d b oul , c rm n fi ive ny g at a s d oul l w osa rop s p don’ Gor ing ment ple n im ut i irc he ha f t e o nitud mag h the houg al, t pos pro dete rm ine if e ven a de bt-heav y v ers ion of T ung ’s a ppr oac h co uld m atc h the ris k-a versi
on- ba of lem rob l p tia ten po s a lve so lso l a osa rop s p on’ ord s. G on’ ord G of cts effe ng uci ind nk See i y. sar ces ne hen s w ank e b liz pita eca o r ng t aili ns f tio osi ty p qui gh e hi ith rs w age man
d. er rm fo ld, Fu ard ich R for ed nam m,” ble pro ld “Fu the es olv al s pos pro the at th ting (no 12 at
CEO o f L ehm an Br oth ers ).
59. Krawc heck ,
supra
no te 4, at 108 -09 . K raw che ck als o s um mar ize d th e m ain po int
s y isk s R Les ks Ban ake M to How ck, che raw K llie Sa See t. Pos ton uffing e H th for ry ent an in , llie /sa com ost. onp ngt uffi w.h ww p:// htt M), 8:00 A 13, 2012, June ( OST P UFFINGTON H -s ck’ che raw , K ion icat ubl r p afte oon ml. S 1590794.ht _b_ nks -ba orm ref et- stre all- ck/w che kraw
nam e w as f loat ed as a pos sibl e S EC com mis sio ner .
See
Ben Pro tes s & Sus anne Cra ig,
As M), 2:54 P , 2012, v. 8 (No IMES T . N.Y – EALBOOK , D s Shift ace . R .C .E ut, S s O rop ial D Offic
htt p:// deal book .ny tim es. com /201 2/11/ 28/as -m ille r-dr ops -out -ra ce-fo r-s-e-c -ch ief -sh ifts /?_ r=0 .
60. Kra wch eck,
supra
no te 4, at 109.
61.
See
S han ny B asar ,
How to F ix the Ban kin g S yst em
, F IN . N EWS (May 24, 2012)
, ar- he H In t ks; -ban xes ck-fi che aw -kr lie sal -24/ 2-05 201 ry/ /sto om s.c ew aln nci ina .ef ww ://w http
vard Busi ness Rev iew , S alli e K raw check ’87 Cal ls f or B ank ing Ref orm
, M OREHEAD
-C AIN
(Ju ne 1, 2012), h
ttp ://m ore hea dcai n.o rg/ about / n ew s/s allie _kr aw che ck_ hbr _ban k_r efo rm
; 24, 2012, (May ANKER B . M , A m ble Pro nce erna Gov ave a s H ank eck: B wch Kra e, lin n K Ala 1:4 0 PM ), htt p://w ww .am eri can ban ker .com/p eop le/s alli e-kra wch eck -ha rvard -bu sine
ss- are Sh check raw lie K Sal xec E erica Am of ank Ex-B el, ani ’D dam O ; A tml -1.h -1049619 iew rev
s com als. urn zjo .bi ww ://w ttp , h PM) 2:49 23, 2012, J. (May . US B HARLOTTE , C s ank for B ice Adv
/ l. .htm llie -sa xec ca-e meri of-a bank- ex- 05/ s/2012/ ote k_n /ban blog te/ lot char 62. Joe Noc era, Op-Ed.,
The S im plic ity S olu tio n
, N.Y . T IMES , May 29, 2012, at A
23.
Act ual im ple ment atio n of such deb t c omp ensa tio n pro posa ls
has of S ank al B Roy ms— fir ish rit e B om t. S oin his p to t dic ora sp been cot
- in ebt d d ate din bor su ded inclu have r— ula tic par in yds Llo and land lieu o f c ash b onuse s. 63 H owev er, t hese alt erat ion s ap pear to
have ns atio ider cons et she nce ala y b h b muc as ast le at ven dri been as
in- e in- t-lik deb ingent cont ed duc intro lso as a ays h arcl B ts. e effec tiv cen strum ent s int o p ay pac kag es. 64 In th e U nited S tate s, K enne th Fe
in- orce t, f men art Dep ury reas T U.S. the for zar ay C s P ng a rvi , se berg d pen com hen ) w TPUs” (“L ts” Uni nce rma erfo rm P ng-te “Lo o use AIG t - a h on cas d in pai o be ere t Us w LTP he T 65 10. n 20 es i utiv xec ng e sati
fut ure dat e at a val ue k eyed off of bot h A IG su bor din ate d d eben tur
es zar Pay C the ough lth A 66 tio. e ra -on -to our t a f , a tock n s commo and has si nce fad ed f rom me mory, the F inanc ial S tab ility O ver
sight regu ct to A rank d-F Dod he r t nde te u nda e ma th ins eta il r Counc lat
e itu- l inst ncia ina nt f rta impo ically em syst and anks at b ion sat pen com tio ns t o r educ e e xce ssiv e r isk. 67 In a 2011 pr
opo sed rul e, U .S. reg
ula- tha ing gest sug ork ic w em cad ly a oving ppr te a ci to as far so ent w tors t nsa- mpe co ebt he d us, t Th 68 g. kin k-ta ris ate itig m ight m ebt e d insid
tio n pr opo sal s d esc ribe d abov e m ay beg in to play an ev en m ore sig
nifi- d. war for ng goi ole t r can
2. Ear lier C riti que s
The res pon se t o thes e d ebt com pen sat ion prop osal s in law and
fi- mp- m si cis riti e c f th me o So ed. mut ely tiv ela n r s bee ls ha urna e jo nanc ly ref lect s int ern ecin e di sag ree men ts, w hich a re no t fa tal t o t he g
en- roa app ice e-sl -th -by e pay th zed tici ung cri , T ted As no ect. roj l p era ch nd e a tur struc ital cap ’s ank a b een etw y b arit t p n tha ptio ssum its a for
an exe cut ive’ s por tfo lio is the opt imal so lut ion for risk purp oses . 69
Suc h pro ble ms, th oug h, a re rela tiv ely fix able th roug h tw eak ing— in
63.
See
G eorg e P ark er et al.,
Llo yds Sha res Vol ati le Desp ite PM ’s Sup port
, F IN . T IMES
(M ar. 9 , 2 009 ), h ttp ://w ww .ft .com /int l/c ms/s /0/3 cfa 60c a-0c 20-11d e-b87d -0000779f d2ac
.ht
ml Bonu sh Sla to and em D ent rnm ove G s to ow S B RB or, rean ll T ); Ji ses bonu r 2008 s fo oyd (Ll
s- nus- -bo /rbs b/17 /fe /2009 ess sin /bu .uk .co dian uar w.g ww p:// htt 2009), 17, eb. (F UARDIAN , G es
pay men ts ( Roy al B ank of S cot lan d fo r 2008 bon use s).
64.
See
B ARCLAYS
, D ELIVERING ON
O UR P ROMISES : B ARCLAYS PLC A NNUAL R EPORT
172-73 ( 2010),
avai lab le at
ht tp:// rep ort s.b arc lay s.c om /ar 10/fil es/ Ann ual _R epo rt_ 2010.pd f.
65. AIG , I NC ., L ONG -T ERM P ERFORMANCE
U NITS P LAN (2010 ),
avai lab
le at 1.h xv10w 30/y84839e 5272/0000950123100543 ata/ / d dgar s/e ive rch /A gov ec. w.s ww p:// htt
tm .
66.
Id .
67. 12 U .S. C. § 5641(b) (1) -(2) (2012) .
68. Inc enti ve-Bas ed C ompe nsat ion A rran gem ent s, 76 Fed . R eg. 21,170, 21,199 n
.123 R. p .F. d 17 C R. an .F. 12 C of arts ed p ter scat d at fie odi e c to b 2011) ( . 14, Apr sed opo (pr
t. 248).
69.
See supr a
no tes 49 -52 an d ac com pany ing t ext .
this e xam ple , T ung w oul d su bst itut e a mor e tai lor ed lev el of sub ordi
- 70 e. ackag ay p r’s p anke he b in t ebt nk d ed ba nat Less easily res olve d a re two sets of som ewha t i nter rel ated cr
i- s and lce elli A K from e other th and 71 on, ord y G effre m J fro one ues, tiq Bria n G alle . 72 G ord on’ s ar gum ent is mad e in t he c
ont ext of hi s al
- rel- is and uity eq ible ert onv ia c ng v ayi r p fo osal rop d p usse isc dy d rea ati vely b rie f. R efer enc ing th e Beb chu k and S pam ann appr oac h,
n ini- e a quir ill re e w slic the by aying st, p s. Fir point ee s thr ake he m tia l de ter min atio n as to wha t c ount s in t erm s of the fir m’s cap
ital ssum A 73 c. mimi d to ose upp is s kage pac pay er’s ank t a b tha ure uct str - ach ppro e a lic e-s by-th ay- the p , able raliz gene e s ar rule se the ing
migh t p rovi de ince ntiv es f or m ana ger s to g am e c apit al st ruc tur e d
e- ve chie o a ules t ncy r s age ating ed r gam ve ay ha y m the as just ions cis help ful out com es for the ir struc tur ed f ina nce pro duc ts. 74 Se con d, v
al- s tha itie cur se ank ic b xot e e mor r the fo ult iffic be d to is likely on uati t u- e sec hes of t any M es. tur ruc al st apit s c rm’ ch fi su ds in n fin ofte one rit ies will not tra de in thic k m ark ets , a nd conse que ntly , t here m
ay iving g lly ntia ote , p sures mea unting cco on a ed lac re p ssu pre new be rise to a s epa rat e se t o f iss ues. 75 Fin ally , G ord on sugge sts t hat ev
en ar- , p isk k r ban ct efle bly r lia t re y no ts ma rke t ma deb ick th ely tiv rela tic ula rly giv en t he c urre nt st ate of impl icit gov ernm ent “to o-bi g-to
- 76 es. nti ara gu fail”
Gor don’ s crit icis ms a re esse ntia lly p ract ica l, r evo lvi ng a rou nd th
e he nk t thi to sons rea be ay m here , t ever How y. ilit kab wor ls’ posa pro pro posa ls a re not a s di ffic ult t o im ple ment as sug ges ted . Fo r in
- of ount am ied ecif unsp an lude inc ply sim l to posa pro ’s Tung e, stanc ban k s ubo rdi nat ed d ebt d oes not rest on a n int erp ret atio n of a ban
k art st p fir the ast le s at oid d av e an tur ruc ital st cap ’s pany com ing hold of G ord on’ s crit ique . M ore ove r, to the e xtent t hat a pay -by -th e-sl
ice ous w bvi t o it is no ion, tat pre n inter n such a ly o re ould ch w roa app hy ight s m ule such r e, urs f co . O oped vel de be not ld cou mb thu s of rule
70.
See su pra
no te 48 an d ac com pan yin g te xt.
71.
See
G ordo n,
supra
no te 4, a t 9 -10.
72.
See
A lce s & Gal le,
supr a
n ote 6 , at 65-71. Kar l O kam oto and D oug las Edw
ards y c The 182-205. 6, at te no pra su ds, dwar & E oto kam O See ls. osa rop e p e th ciz riti o c als on- uti xec e e hos e t aus t c fac in ay m lio tfo por ’s ive cut exe an in ng agi ver ele d d rce fo hat d t ten ves ece the r ith nt w ste nsi co uts ayo e p iev ach ally nti t pote eas at l er to ord in isk t r ou eek to s nt xec e e y th ent b tm ves in igh y h vel ati rel en a giv at e th rgu o a als hey 3. T 192-9 at Id. . past u- or ebt or d orm e f n th es i om ent c stm nve the i her het r w atte ot m s n t doe , i irm e f in th tive
equ ity bec aus e h igh ris k p res ent s th e u nattr acti ve pos sib ility of tota l lo ss i n e ith er c ase .
Id. -96. at 193
73. Gor don ,
supr a
no te 4, a t 9 -10.
74.
Id.
at 10.
75.
See i d.
76.
See i d.
