Executive Compensation in Imperfect Financial Markets
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Executive Compensation in Imperfect Financial Markets

Jay Cullen

This important book discusses the issue of executive compensation in Anglo-American financial markets following the financial crisis. The book begins by contextualizing the problem facing financial institutions in the US and the UK and argues that approaches to government and compensation reform are flawed. It then goes on to offer solutions and suggests that new reforms to executive compensation in financial institutions would be very welcome, despite certain limitations.
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Chapter 8: Conclusion

Jay Cullen


I began this book by querying some of the fundamental assumptions of financial market theory, and thereby questioning the application of those theories to the regulation of securities markets. On this basis, my aim has been to demonstrate that the market pricing mechanism is an inefficient tool upon which to base executive compensation at financial institutions. Specifically, to achieve this task I have attempted to provide answers to three key questions, namely: firstly, how the dominant view of the operation of the market determines the use of equity-based compensation schemes in financial institutions; secondly, why this view is flawed in light of alternative theories of asset and securities markets behaviour, which explains how market prices may become distorted (particularly the FIH); and thirdly, whether those alternative financial market theories ought to be considered by regulators in the design of future compensation systems following the GFC, which exposed the limitations of market discipline and the futility of relying on market pricing to deliver optimal compensation awards. Until recently, absolute faith was placed in modern finance theory (which contends that the market is comprised of an agglomeration of supremely rational, calculating and self-interested beings) and free market principles underpinned the regulation of corporate governance. Market discipline was trusted to deliver optimal governance arrangements through the actions of shareholders, board engagement, the influence of the market for corporate control, and the role of creditors and other outside corporate monitors.

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