An interesting solution to fixing the bonus problems caught my attention in March 17 Wall Street Journal; “Real Time Economics” column, as reported by Justin Lahart.
It seems that some firms have already begun compensating executives by putting bonus money into an escrow account, or “clawback”…in other words, the money is there but you have to earn it with good performance.
But economists Alex Edmans at Wharton, Xavier Gabaix and Tomasz Sadzik at NYU, and Yully Sannikov at Princeton have gone beyond the clawback approach and come forth with what they call “dynamic incentive accounts.” Top managers’ compensation would be placed into escrow accounts that would be invested in company stock and cash. Each month the account would be rebalanced, so that if the money in stocks declined due to the price of the stock declining, then the cash account would be drawn down to buy more stock.
Their thinking is that this would ensure that managers held company stock even if the firm’s value fell. (Would also solve the problem of managers’ stock options getting repriced lower after a decline, which only rewards them for failure).
Taking it even a step further, each month a fraction of the incentive account would vest and be paid out. After leaving the firm the account would continue to vest slowly, paying out after a number of years and preventing the problem of CEO’s pushing for short term gains as they retire.
I don’t really have an opinion on this at this point…just watching and waiting for it all to fall in place, but it makes for interesting reading. I’m sure we will see more creative “solutions” in the weeks to come….
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