Equity Linked Compensation as a Risk Management Tool in the Good Governance of U.S. Investment Banks

Due to the separation between ownership and management and, in the absence of at least a single major shareholder, executives of publicly traded companies have almost complete power and discretion in management to pursue projects that benefit themselves personally but which may not optimize shareholder interest (Berle and Means, 1932).The focus of this paper is on the structure of chief executive officer (CEO) and chief financial officer (CFO) compensation packages of publicly traded financial1 companies in the United States, their effect on excessive firm risk taking, and the perceived role of Board directors in mitigating this risk as a good governance obligation. The addition of CFO’s in this analysis reflects the findings in Chava and Purnanandam (2010) and Jiang, Petroni and Wang (2010) that incentives of CFO’s could be more influential in