Magazine article American Banker

CEO Pay Encourages Bigger Risks at Two of Top Four Banks

Magazine article American Banker

CEO Pay Encourages Bigger Risks at Two of Top Four Banks

Article excerpt

Byline: Harry Terris

In setting incentives for senior executives, it might be the options already awarded over the years that really matter.

As eye-popping as annual compensation packages can be a JPMorgan Chaseas chief executive, Jamie Dimon, was the biggest winner among the Big Four megabanks in 2011, with a $23 million payday a potential swings in the value of outstanding stock and option awards can often be far greater.

Dimonas holdings of such awards were worth $44 million at yearend. Because option values are so sensitive to changes in share price, just a 50% rise in JPMorgan Chaseas share price would have increased Dimonas net worth by a full $58 million. (In fact, his companyas shares had gained 30% this year at the close of trading Monday.) From one perspective, that is as it should be: Dimon has an enormous incentive to build up JPMorgan Chaseas stock price, serving the interests of investors in the company.

But since upside outcomes can outweigh what could be lost in a wipeout, large portfolios of options can act as an inducement to make large, risky plays.

Boards should take care that incentives encoded in accumulations of stock and options awards are not aencouraging something unintended,a says Brian Tayan, a researcher at the Stanford Graduate School of Business who co-authored a paper on the subject this month with David Larcker, an accounting professor there.

aAccumulated wealth effects are likely to swamp those of year-to-year compensation,a they wrote. …

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