IDEAS home Printed from https://ideas.repec.org/a/wsi/afexxx/v07y2012i01ns2010495212500030.html
   My bibliography  Save this article

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

Author

Listed:
  • GUY KAPLANSKI

    () (Faculty of Social Sciences, School of Business Administration, Bar-Ilan University, Ramat-Gan 52900, Israel)

  • HAIM LEVY

    () (The Hebrew University of Jerusalem and The Center for Law and Business, Israel)

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).

Suggested Citation

  • Guy Kaplanski & Haim Levy, 2012. "Executive Short-Term Incentive, Risk-Taking And Leverage-Neutral Incentive Scheme," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 1-45.
    • Handle: RePEc:wsi:afexxx:v:07:y:2012:i:01:n:s2010495212500030
    DOI: 10.1142/S2010495212500030
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S2010495212500030
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Efraim Benmelech & Eugene Kandel & Pietro Veronesi, 2010. "Stock-Based Compensation and CEO (Dis)Incentives," The Quarterly Journal of Economics, Oxford University Press, vol. 125(4), pages 1769-1820.
    2. Bebchuk, Lucian Arye & Fried, Jesse M. & Walker, David I., 2001. "Executive Compensation in America: Optimal Contracting or Extraction of Rents?," Berkeley Olin Program in Law & Economics, Working Paper Series qt1x24r7st, Berkeley Olin Program in Law & Economics.
    3. Bierens,Herman J., 2005. "Introduction to the Mathematical and Statistical Foundations of Econometrics," Cambridge Books, Cambridge University Press, number 9780521834315, June.
    4. Manoj P. K, 2007. "ICT Industry In India: A Swot Analysis," Journal of Global Economy, Research Centre for Social Sciences,Mumbai, India, vol. 3(4), pages 263-278, December.
    5. Bebchuk, Lucian Arye & Fried, Jesse & Walker, David I, 2001. "Executive Compensation in America: Optimal Contracting or Extraction of Rents," CEPR Discussion Papers 3112, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wang, Cheng, 1997. "Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model," Journal of Economic Theory, Elsevier, vol. 76(1), pages 72-105, September.
    2. Rui R. Zhao, 2008. "All-or-Nothing Monitoring," American Economic Review, American Economic Association, vol. 98(4), pages 1619-1628, September.

    More about this item

    Keywords

    Executive compensations; leverage-neutral bonus scheme; bonus cap; risk-taking; JEL Classifications: G3; JEL Classifications: G38; JEL Classifications: J33; JEL Classifications: M52;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:afexxx:v:07:y:2012:i:01:n:s2010495212500030. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tai Tone Lim). General contact details of provider: http://www.worldscinet.com/afe/afe.shtml .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.