This post comes to us from Claire Hill and Richard Painter. Claire Hill is the Solly Robins Distinguished Research Fellow and Professor of Law at the University of Minnesota Law School; Richard Painter is the S. Walter Richey Professor of Corporate Law at the University of Minnesota Law School. The post relates to a recent paper by Professors Hill and Painter, which is available here.
Commentators on this blog and elsewhere have discussed solutions to problems that caused the most recent financial crisis. A pervasive theme has been the excessive appetite for risk in the banking industry and the impact of compensation on attitudes toward risk.
Some commentators have proposed making stock-based compensation more “long term” by requiring bankers to retain stock holdings in their employers. Others such as Lucian Bebchuk and Holger Spamann have recommended that bankers’ compensation be tied to the fortunes of creditors, not just shareholders. (Learn more about their views here.) Many of these proposals would be an improvement upon the status quo.
We are concerned, however, that these proposals – and others currently being considered in Congress – do not go far enough in linking the financial interest of bankers with the financial health of their banks. Bankers may lose upside profits if their banks do not do well, but they do not share the downside impact that their own risk taking has on broad segments of society – creditors, customers, employees and ultimately, taxpayers.
