Lehman, Bear officials gained US$1 bil.: study

The top five executives at each company lost less from the crash of their companies' stock — relative to the value of their holdings in 2000 — than they gained from cash bonuses and stock sales in the preceding eight years, according to a report released Monday by Harvard Law School's Program on Corporate Governance.

The five at Lehman, which filed for bankruptcy in September 2008, received a total of US$1.03 billion in cash bonuses and proceeds from stock sales during the period, while Bear Stearns's top executives collected US$1.46 billion in the years before JPMorgan Chase & Co. agreed to buy the firm in 2008. Including the value of their remaining stock holdings, if there was any, the Bear Stearns executives ended up with US$664.1 million more than the value of their company's stock in 2000, and Lehman officials cleared US$431.9 million, the study said.

“Excessive incentives to take risks might have been generated by executives' ability to cash out compensation based on the firms' short-term results,” said the report, “The Wages of Failure,” written by Harvard professors Lucian Bebchuk, Alma Cohen and Holger Spamann. “To the extent that executives did cash out large amounts of such compensation, their decisions might have been distorted by an excessive focus on short-term results.”

Congress and regulators are considering new rules to ensure compensation doesn't create incentives for the risky investments that brought the financial system to the edge of collapse last year, prompting bailouts of firms including Bank of America Corp. and Citigroup Inc.

The Federal Reserve has offered guidelines on tying pay to risk management. Senator Christopher Dodd, chairman of the Senate banking committee, introduced a bill Nov. 10 that would give shareholders of publicly traded firms a non-binding vote on executive compensation and allow it to be recouped if based on inaccurate financial statements.

“The divergence between how the top executives and their shareholders fared implies that it is not possible to rule out, as standard narrative suggests, that the executives' pay arrangements provided them with excessive risk-taking incentives,” the report said.

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