Though Wall Street CEOs have routinely denied being aware of the risks that led up to the 2008 financial crisis, a new U.S. study suggests otherwise. Sanjai Bhagat at the University of Colorado and Brian Bolton at the University of New Hampshire looked at the compensation of executives at the 14 largest U.S. financial institutions, including Goldman Sachs and Lehman Brothers, in the period between 2000 and 2008. Focusing on CEOs’ trading of their banks’ stock, the academics found that executives were 30 times more likely to sell than to buy. One would expect confident CEOs to hold on to their shares, or even buy more. What’s more, the dollar value of those sales were about 100 times the value of open market buys.
These trends suggest the executives also did not believe in the risks their banks were taking. Worse still, Bolton and Bhagat say the CEOs turned a profit, what they called “the net CEO payoff,” because their earnings were greater than the value that shares lost in 2008 by US$649 million. The authors argue such bad behaviour could be curbed by a compensation model that gives executives restricted stock options. Instead of buying and selling any time, CEOs would have to hold their shares for up to four years after their last day in office.