Compensation of Bank Executives
By Arnold Kling
New evidence in favor of the second interpretation [that bank executives were evil] has just become available, thanks to the efforts of Sanjai Bhagat and Brian Bolton. These researchers went carefully through the compensation structure of executives at the top 14 US financial institutions during 2000-2008.
The key finding is that CEOs were “30 times more likely to be involved in a sell trade compared to an open market buy trade” of their own bank’s stock and “The dollar value of sales of stock by bank CEOs of their own bank’s stock is about 100 times the dollar value of open market buys”
The paper that Johnson cites is, in my opinion, overly simplistic.
Shareholders can compensate executives partly by using restricted stock (stock that cannot be sold for a period of time) and stock options that vest gradually. These mechanisms provide some incentive for executives to focus on long-term franchise value. However, short of making banks into partnerships, there is no way to force executives to hold onto their stock forever.
Once they are able to sell their stock, you would expect bank executives to sell. They want to diversify their holdings as much as possible. Moreover, it is dangerous for bank executives to buy their own stock, both financially and legally. (Legally, frequent trading in their own stock would subject them to all sorts of potential hazards. As it is, even sale of stock has to be done carefully, to avoid insider trading issues.)
The authors’ sample period of 2000-2008 seems rather long relative to the point they are making. If the bank executives were truly knaves, they would have bought stock in the early part of the sample period and sold it in the latter part of the sample period. Or at least they would have arranged to have a larger share of their compensation in stock in the earlier period and a smaller share in the later period.
Look, am I a fan of bank executives? Not at all. Do I think that bank executives should enjoy limited liability? No, I have often written that I think they should face the possibility of prison if their institutions fail.
However, if you want to convince me that bank executives were more knaves than fools, then you need to come up with a more solid study than this one.