Would putting bonus payments into escrow accounts have solved the banking crisis?

A fascinating new report on bonus payments has recently been published by a team of academics led by Alex Edmans from the Wharton Business School.  In it they propose the use of 'escrow accounts' as a means of withholding bonus payments and share options until the employee leaves the company.  The suggestion is that the use of such accounts would link bonuses more to the long-term success of the company and prevent short-term behaviour such as the share price manipulation that saw the demise of Enron.  From the report.

"Linking compensation to share price has been viewed as a way to make sure the interests of the CEO and other top managers are aligned with those of shareholders,"

"In recent years, however, the system has encouraged executives to take actions that boost share price in the short term but hurt shareholders and other stakeholders later, after the executive has cashed out,"

He goes further and suggests that for a manager to be suitably motivated requires an increase in company value and an increase in pay.  He gives the following example.

"If the CEO earns $5 million, he would be given $3 million in stock and the remainder in cash. If firm value rises by 10 per cent, his stock will now be worth $3.3 million and the cash remains at $2 million. Total pay rises from $5 million to $5.3 million, an increase of 6 per cent,"

He regards this kind of bonus split as providing a good mixture of cash and equity remuneration, with 60% in shares and 40% in cash.  If the share price fell therefore cash would be used from the account to purchase additional equity to ensure the balance is maintained.  This differs from the current approach where the price is simply realigned or additional shares are assigned.  Alternatively if the shares went up, they could be sold for cash.

Whilst looking to improve the bonus culture is fundamentally sound it is perhaps worthwhile exploring alternatives as well.  Motivation isn’t all about money. Our own research shows that people are far more interested in opportunities for professional development than financial incentives. The recession has shown how damaging an excessive bonus culture can be and it is time for organisations to recognise that people are hungry for opportunities as part of their remuneration packages. The tough economic climate means that employers are increasingly looking for alternative ways to reward their staff. From extra holiday, to more flexible hours and paying for training, being innovative with incentives is more cost effective for business and better for morale.