New York Times publishes Prof. Andrew Lund’s letter to the editor

Prof. Andrew Lund, together with a law professor from the University of North Carolina at Chapel Hill, published a letter to the editor in the New York Times this week. Titled, “Is it Time to Take Away the Bankers’ Bonuses?” the letter responds to a Nov. 8 op-ed by Nassim Nicholas Taleb, which argues that bonuses for employees of banks and too-big-to-fail financial institutions should be banned.

But Lund and his co-author Gregg Polsky argue:

One problem with Mr. Taleb’s argument is that it ignores the intense pressure exerted on senior management to satisfy the market’s short-term stock price demands. Research shows that chief executives are more likely than ever to get fired if their company’s share prices languish relative to their peers.

Senior executives naturally respond to this environment by taking risks that prop up short-term share prices. Even if bonuses were banned, shareholders and boards would continue to push chief executives to accommodate their appetite for higher share prices and the corresponding high levels of risk.

While lower-level employees may not be directly subject to this market pressure, senior executives will push their subordinates to take risks necessary to maintain short-term share prices to preserve their own jobs. Accordingly, we are skeptical about Mr. Taleb’s claim that eliminating banker bonuses will lead to less risky behavior.

 

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