Determinants Of The Use Of Financial Incentives Essay

Determinants Of The Use Of Financial Incentives - Essay Example Bankers had anticipated a continuous growth in the property market, and loans had been disbursed to people with low creditworthiness to show a growth in the business. Financial products called mortgage-backed securities had enabled financial institutions and investors around the world to invest in the U.S. housing market. Major banks and financial institutions reported losses of approximately US$435 billion as of 17 July 2008, as these securities derived their value from mortgage payments and housing prices. As a result of this crisis, the most revered names on Wall Street have had to eat humble pie. In September 2008, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis. At almost the same time, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection, shocking the whole world. The collapse of Bear Sterns hedge funds is another example of the short-sightedness of investment banking. Controlling for CEO pay-performance sensitivity (delta) and the feedback effects of firm policy and risk on the managerial compensation scheme, it is observed that higher sensitivity of CEO wealth to stock volatility (vega) implements riskier policy choices, including relatively more investment in R&D, less investment in PPE, more focus, and higher leverage. We also find that riskier policy choices generally lead to compensation structures with higher vega and lower delta. Stock-return volatility has a positive effect on both vega and delta. C. How investment banks use and report executive compensation schemes Quantitative analysis of a detailed industry-wide survey validates the hypothesis that those occupations where the output is easily identifiable receive higher bonus pay. The proximity of an occupation to the revenue generating activity within the organization is also found to be significant in determining bonus levels, as is job grade within the organization.