Executive Compensation Based on Asset Values

Hans Byström

No 2010:9, Working Papers from Lund University, Department of Economics

Abstract: This paper describes how credit default swaps could be employed to create performance based executive compensation portfolios that reflect the value of a firm’s debt as well as equity; i.e. the total value of all a firm’s assets. So-called Asset Value Unit (AVU) compensation portfolios are defined and compared to ordinary (long-term incentive) stock compensation portfolios for a range of banks from the recent EU-wide stress testing exercise conducted by the Committee of European Banking Supervisors (CEBS). While our study is limited to bank executives, the suggested method of paying executives using credit default swaps in addition to stocks also works for non-financial firms as well as for non-executives. The empirical results suggest that executive/CEO compensation plans based on asset values behave more reasonably than traditional equity based plans.

Keywords: executive pay; executive compensation; stock; credit default swap; bank; stress test (search for similar items in EconPapers)
JEL-codes: G10 G21 G34 G38 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2010-08-14
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn and nep-lab
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Published as Byström, Hans, 'Executive Compensation Based on Asset Values' in Economics Bulletin, 2012, pages 1498-1502.

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