The wages of sin

The New York Times has a very confusing write-up of the Bebchuk, Cohen and Spamann paper on executive compensation at Bear Stearns and Lehman Brothers. The paper itself is crystal clear. From the conclusion:

The stories of Lehman and Bear Stearns will undoubtedly remain in the annals of financial disaster for many years to come. To understand what has happened, and what lessons should be drawn, it is important to get the facts right. In contrast to what has been commonly assumed thus far, the top executives of those two firms were not financially devastated by their management of the firms during 2000-2008. They were able to cash out rather large amounts of performance-based compensation, both from bonuses and from share sale, during the years preceding the firms’ collapse. This cashed-out performance-based compensation was large enough to make up the losses on the executives’ initial holdings in the beginning of the period. As a result, the executives’ net payoffs from their leadership of the firm during 2000-2008 were decidedly positive.

Thus, the large paper losses that the executives suffered when their companies collapsed should not provide a basis for dismissing either the possibility that executives’ choices have been influenced by excessive risk-taking incentives or the importance of improving compensation structures going forward. Legislators and regulators seeking to prevent future crises would do well to consider seriously the role of incentives in the financial crisis of 2008-2009 and the fixing of such incentives in the future.