In fact, pay arrangements did provide substantial incentives for excessive risk-taking. Under the standard design of pay arrangements, executives were fully exposed to the upside of risks taken but enjoyed substantial insulation from part of the downside of such risks. As a result, executives had incentives to increase risk-taking beyond optimal levels.
The trouble with this rhetorical move should be obvious. Unfortunately, Bebchuk's not the only one peddling it. So I was forced to spell out the problem in my book Corporate Governance after the Financial Crisis
Scholars are divided as to whether this incentive structure causally contributed to either the housing or credit crunch. Grant Kirkpatrick contends that incentive pay encouraged high levels of risk taking. Richard Posner argues that the structure of executive compensation practices encouraged management to cling to the housing bubble and “hope for the best.” In contrast, Peter Mulbert contends that the empirical evidence does not support treating compensation as a major causal factor. What seems clear, however, is that the problem was localized to the financial sector. Whether or not financial institution executive compensation practices contributed to the crisis, there is no evidence that executive compensation at Main Street corporations did so.
Accordingly, using the financial crisis as a legitimate rationale for regulating Main Street executive compensation practices is a bogus argument.
