There probably won't be anyone reading this first issue of my new blog considering its infancy and the fact that I haven't quite told anyone about it just yet. I'm a business student at the Desautels Faculty of Management (McGill University) in Montreal majoring in Finance and have taken quite an interest over the past few years in international economics and diplomacy. My intent is to use this parcel of cyber-space to comment on current events relevant to the aforementioned fields and, hopefully, share the experience of a Finance student in the current economic and labour conditions.
I'd like to kick off this first post by considering an issue that is hard to address and important in financial industry at this moment: pay regulation. While, broadly speaking, I dislike the thought of government-regulated pay of financial executives, I still agree with Professor Hamilton's comments on the need to re-establish the link between shareholders' incentives and executives':
One of the key questions for understanding the causes of our current problems is the following. Suppose that in 2005, the individuals who were putting together securities derived from subprime and alt-A mortgage loans could have known, with perfect foresight, events that were going to unfold in 2008. Would they have still done the same things they did in 2005? My concern is that, for many individuals, the answer might be "yes", insofar as they were richly rewarded personally in 2005 for making exactly the decisions they did. It was other parties (namely you and me) who later down the road were forced to absorb the downside of their gambles. Capitalism functions well when individuals are rewarded for making socially productive decisions. It is a disaster when individuals are rewarded for making socially destructive decisions. For this reason, I am quite supportive of the broad idea of the above proposal.
Specifically, top executives' pay should skewed more towards either deferred pay over many years and/or linked to equity with longer requirements of minimum holding time before selling. This would provide an environment where firms can compete for the best minds by providing great incentives yet still align their firm's long-term interests with those of their managers.
