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Debtlinkedexecutivepayoption the main culprit

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Unformatted text preview: r Sterns • Remove any incentive for the CEO to accelerate retirement • Make it less likely to take short term return oriented decisions during the final few years of retirement Table 1: Different ESO policies 5 4. Debt Linked Executive Pay Option The main culprit identified for the financial meltdown in the recent past was ESO. So there was a huge hue-n-cry to look for a better alternative method of executive compensation. Hence debt has been proposed as a linking parameter with the executive compensation from then on “either directly by giving them debt-like securities (bonds, pensions or deferred compensation) or indirectly by linking their bonuses to the price of debt or a firm’s credit rating or credit default spread” 6 . Corporate houses like AIG have already started using it as executive compensation means. 4.1 Literature Review Earlier much work has not been done on the debt aspect of the executive compensation; mainly due to the unavailability of relevant data (disclosure of debt compensation was limited). But few recent studies have revealed that debt like component in the compensation package of the executives are not a new phenomenon. Sundaram, Yermack 2007 revealed in their paper that the CEOs ( like Jack Welch, CEO, GE) hold a substantial amount of debt in their own firm, known as “inside debt”, in the form of defined benefit pensions and deferred compensation. Similar argument has been supported by other academicians also. 4.2 Benefits of Debt Linked Pay Option For firms with high leverage, it is illogical to link the executive compensation with only equity. Thus it will be better to link executive compensation with debt for large financial institutions and project managers of PPP projects having high D/E value. Lender’s Incentive: Unlike ESO, in case of debt linked compensation the executives’ incentive can be tied to the incentive of the lenders. So the executive is concerned both about the chances of bankruptcy and also the asset loss due to bankruptcy. Earlier...
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