When company takes a poor turn, supervisors whose damages only ever comprises equity-like devices, including stock and options, are often tempted to take larger risks in a last-ditch effort to salvage their businesses. But even if their firms go down in flames, these managers usually emerge with fewer scars than those unlucky bondholders saddled with the debt that is consequent. The litany of corporate failures in America and elsewhere stays fresh in everybody's recollection.
This informative article is founded on a paper originally composed with Qi Liu of Wharton, forthcoming in the Review of Finance, which has brought considerable attention for being the first to show that debt compensation could be a best element in the executive reimbursement, principally when a corporation confronts a financial issue. Instead of the typical practice of paying top supervisors heavily with stock, the writer recommend giving them debt-like securities, for example bonds, pensions or deferred compensation, or linking their bonuses to the cost of debt or to a firm's credit rating or credit default option is extended.
He advocates what the quantity of a manager's compensation should be issued in the debt: equal percentages of debt/equity if the manager only ever takes job-choice decisions; less so in situations when a CEO has to take decisions in which "effort" is a key variable, depending on whether attempt has a greater effect on the company's solvency value or liquidation value.
PUBLICATION DATE: December 15, 2010 PRODUCT #: IIR039-HCB-ENG
This is just an excerpt. This case is about FINANCE & ACCOUNTING
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