Monday, November 09, 2009

Unintended Consequences - Bank Bonus Edition

The banking system is still in disarray after last year's crash. Propped up by government loans (i.e. taxation and national debt), we are looking at an uncertain future. One way that regulators sought to punish bank executives whose policies lead to the crash was to decrease mandated bonuses. One way to do this was to make the bonuses payable in depressed stock. Brilliant idea, right? After all this would encourage executives to take actions that would be in the long-term interests of the company.

Instead, the stock payments are liked to end up in huge windfalls as stock prices have risen from their original valuation, giving executives an excellent reason to sell and reap large cash payments.

Economics - the game whose rules you never really know until afterward.

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