Financial institutions

Beware the perils of paying CEOs with stock

June 2, 2011: 1:48 PM ET

Regulators ought to pay closer attention to the growing body of evidence that CEOs paid in stock and options are not any more likely to act in his or her company's best interest.

By Eleanor Bloxham, contributor

FORTUNE -- If regulators are serious about addressing compensation and risk at financial institutions, they ought to pay much closer attention to paydays that come in colors other than green.

The comment period for a proposed multi-agency rule that addresses executive compensation practices at financial institutions ended on May 31, but the proposed rule left a gaping hole in its failure to address the potential impacts of stock and options incentives on a financial institution's risk profile and performance.

Research by professors RĂ¼diger Fahlenbrach and RenĂ© M. Stulz in 2010, following the financial crisis, demonstrated why equity pay should not be ignored. While the knee jerk reaction is that if an executive is paid in equity, it will align that executive's interests with the company's shareholders, the research didn't demonstrate any such benefits.

According to the research, "banks where CEOs had better incentives in terms of the dollar value of their stake [in the company] performed significantly worse than banks where CEOs had poorer incentives."

"The top … equity positions at the end of fiscal year 2006 [were] held by James Cayne (Bear Stearns, $1,062 million), Richard Fuld (Lehman Brothers, $911.5 million), Stan O'Neal (Merrill Lynch, $349 million)[and] Angelo Mozilo (Countrywide Financial, $320.9 million)."

All of those firms fared poorly in the crisis. They were either sold in distress, or in the case of Lehman, went bankrupt. More

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