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Executive Compensation in Investment Banks - Essay Example

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Executive Compensation in Investment Banks

Initially it was the investing public that was greatly affected, but as the crisis grew and the state had to intervene, it was the common man who stands out as most hurt, not only in the US, but across Europe and the world. Apart from bearing the full force of the crisis in terms of recession, unemployment, it is his money that is being used to bailout companies from the mess created for which he is in no way responsible.
The media, the public and the politicians are busy naming the culprits for the crisis. The state regulators are trying hard to exonerate themselves by saying it did everything to prevent it and academicians are busy trying to analyse and suggest solutions. The analysts and executives who are being seen as the immediate malefactors are facing the media and public ire for the alleged role they played in the process.
The important thing about this crisis is that it is not something that happened by a set of circumstances which developed overnight. There have been two similar occurrences, though of lesser magnitude in the last decade, the stock market bubble in the mid nineties and the crisis following the dot.com bubble burst in the earlier part of the century. At both times the reactions of the media, public and regulators have been similar, but apparently whatever remedial action taken by the regulators and the industry does not seem to have prevented the recurrence of the present crisis. Questions are still being asked on how this has happened Can these be prevented Are these inherent risks in a capitalist and market economy and therefore these are unavoidable If so, how should they be mitigated What and who is responsible for the present crisis What has been the role of the state and regulators
The questions being attempted to be answered in these area are more specific namely if the executive compensation in investment banks are flawed and whether disclosures made in Reports and Accounts have given information to shareholders about long term prospects of the company to justify such high compensation and how these have affected shareholders wealth erosion in the present crisis.
There is a universal agreement across academicians, industry, regulators and media that executive payments in investment banks are indeed very high.
"Firms make lots of money, and use about half of it to overpay their employees."(Brown, 6)
CFA UK's analysis of pay structure of employees of investment banks (Annexure A) and concedes that they are very high compared to other business sectors. Even if we concede for the moment that the remuneration and incentives paid to employees and CEOs of investment bank is disproportionate to what they really deserve, and this had a bearing on the crisis, this cannot be the reason for the crisis.
Three articles have been chosen from three different sources-the media, academic research and industry association to see how much they agree with the statement. These have been taken from three different periods of time, one immediately after the previous crisis of 2002, one midway between the last two crises (2007) and one not more than a month ago after the full impact of the crisis was beginning to unfold (2008).
The first one is written by Gretchen C. Morgenson et al. (2002) appeared in May 2002 in the Money and Business/ Financial section of ...Show more

Summary

In recent years, investment banks have paid large bonuses to many of their employees. The collapse of several well-known organisations indicates that executive compensation schemes are inherently flawed, and that requirements to disclose these in the Reports & Accounts of listed companies do not provide shareholders with useful information about companies' long-term prospects."
Author : schimmelkyler
Executive Compensation in Investment Banks essay example
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