Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2010:9: Executive Compensation Based on Asset Values

Hans Byström ()
Additional contact information
Hans Byström: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

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

JEL-codes: G10; G21; G34; G38

21 pages, August 14, 2010

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