THE TROUBLED ASSET RELIEF PROGRAM (TARP) FIRMS AS A QUASI EXECUTIVE COMPENSATION-SETTING LABORATORY

Abstract

Agency theory suggests that as external dedicated ownership increases in a firm, the agents would act more responsibly (i.e. extract less rent) and executives‘ interests are more likely to be better aligned with those of the shareholders. We explore the role of the government as an owner during the bailout of the financial sector after the 2008/2009 financial crisis and the impact it had on CEO compensation at top TARP banks. Our analysis of the Obama administration‘s pay czar‘s effort to align top TARP firm CEO/top executive compensation with those of shareholders against agency-theoretic principles suggest that the effort was only marginally successful. We suggest that the transient nature of the government‘s influence, among others, was a significant reason that attenuated the government‘s efforts to have long term changes in top executive compensation at TARP firms. We also offer socio-political and managerial power arguments as alternative explanations of why seemingly inefficient or suboptimal executive compensation persists in the US.