Executive Compensation in Imperfect Financial Markets


Executive Compensation in Imperfect Financial Markets

9781782549284 Edward Elgar Publishing
Jay Cullen, Head of Department of Law and Criminology, Edge Hill University, UK
Publication Date: 2014 ISBN: 978 1 78254 928 4 Extent: 264 pp
This important book discusses the issue of executive compensation in Anglo-American financial markets following the financial crisis. The book begins by contextualizing the problem facing financial institutions in the US and the UK and argues that approaches to government and compensation reform are flawed. It then goes on to offer solutions and suggests that new reforms to executive compensation in financial institutions would be very welcome, despite certain limitations.

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The recent financial crisis and associated real estate bubble demonstrated the damage that can be caused by imperfect financial market pricing. On the basis of these imperfections, strong financial returns earned by financial institutions in the run-up to 2008 were, in fact, illusory.

Executive Compensation in Imperfect Financial Markets explores the relationship between bank lending, real estate markets and stock market prices. Offering a heterodox view of financial market pricing and its relationship with executive pay, this book offers a competing interpretation of the recent crisis, which emphasises the role of bank leverage and investor expectations in generating instability – particularly through the interaction of financial institutions with the real estate market. In the process, it reveals that equity-based compensation incentivized increased bank leverage, which was a cardinal cause of the crisis.

This timely book will be an essential read for all legal scholars and policy analysts operating in the field of banking and finance, as well as all those seeking a more rounded understanding of the financial crisis.
Critical Acclaim
‘Jay Cullen’s important book challenges the conventional wisdom that financial corporations will automatically further the public good as long as senior managers’ pay is aligned with the share price. Drawing on behavioural finance and Minskyan economics, Cullen shows that flawed market pricing can cause, and result from, excessive risk-taking. As seen most recently in the financial crisis, these practices leads to enormous social costs, yet regulators face considerable pressure not to intervene in these market outcomes. The inclusion of an overview of recent regulation in this fast-moving area, as well as further suggestions for reform, makes this lucid and topical book essential reading for researchers and policy-makers in the field of corporate governance.’
– Andrew Johnston, School of Law, University of Sheffield, UK

‘So much work on executive remuneration has looked at the specifics of executive compensation schemes without raising fundamental questions about capital markets'' ability to price companies properly. This book has come to close this gap. With crisp and informed analysis of capital market dysfunctionalities, Dr Cullen''s book brings an entirely new perspective on how to fix a broken system. Corporate boards, lawyers, and economists should all take stock of Cullen''s argument.’
– Emilios Avgouleas, University of Edinburgh, UK

‘Cullen’s timely and important book demonstrates exactly what the problem is with executive compensation in banking and how to improve it. The current populist approach to simply cut banker pay is rejected in favour of a far more nuanced approach, fully cognizant of the inefficiencies in the very markets which value bonus share awards. The book encourages a much-needed long-term approach to compensation whilst also examining in an intelligent way the flaws in our seemingly efficient markets.’
– Trevor Pugh, Head of Sterling Trading, HSBC

Contents: 1. Introduction 2. An Analysis of the Role of Executive Compensation 3. Theories of Securities Market Operation: Principles and Flaws 4. Minsky and the Financial Instability Hypothesis: Implications for Market Efficiency 5. The Global Financial Crisis and the Complex Relationship between Asset Prices, Leverage, and Financial Instability 6. Post-Crisis Reform to Executive Compensation at Financial Institutions 7. Reconstituting Executive Compensation at Financial Institutions: Proposals for Reform 8. Conclusions Index
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