Forget stock options.
Stuff CEOs with cash and bring back the corporate jets and country club memberships. That's the message of new research coming out of Columbia Business School.
The study measured the likelihood of default in 117 banks and other financial institutions from 1998 to 2008. Turns out, the companies that paid executives in shares and stock options were more likely to go bust than those that simply doled out bonuses in cash.
Equity-based compensation, it posits, may have done as much to precipitate the harrowing crisis as adjustable-rate mortgages, naked credit-default swaps or any number of hinky wind-up toys of credit.
The study calls to mind a favorite phrase in the finance world these days: "Heads I win; tails you lose." The executive with stock options will take greater risks to boost the share price. See: "AIG unhedged CDS contracts" or "Lehman leverage ratio."
If the gambit succeeds, it succeeds. If it doesn't, the firm flops, Uncle Sam comes to the rescue and not all is lost.
This dynamic is exacerbated in shaky times, noted Bruce Kogut, a Columbia professor and coauthor of the study.
"The results were pretty clean," Kogut said "Every step along the way, it worked."
Executives that pocket cash, rather than stock, were less likely to rev the corporate engine or try to zip by competitors with gutsy and dangerous maneuvers.
There are no shortage of ideas these days for new compensation structures. For example, Patrick Bolton, also of Columbia, recently suggested tying executive pay to CDS spreads.
Kogut and company stopped short of endorsing any kind of best practice, but they said that companies would do well to consider perks, in addition to dollars.
The argument is that at a certain point, the ability for money to motivate is a diminishing curve. After all, a million here and a million there, and pretty soon you're talking about real dollars.
This is where the "behavioral motivations" come into play -- the G4, the penthouse suite and the Paris pied-a-terre.
"The question is what kind of cheap things corporations can do that really give people a lot of utility -- getting the right country-club membership, for example, or some other public way to display wealth," Kogut explained.
The operative word there is "cheap." When it's time for an executive to move on, those things stay with the firm.
Write to Kyle Stock
Related: New Thinking on CEO Pay