The Pattern in Securitization and Executive Compensation: Evidence and Regulatory Implications

The Dodd-Frank financial reforms of 2010 promised systemic stability through better alignment of risk-reward incentives. Dodd-Frank would achieve this by, among other things, reducing imprudent securitization (i.e., sales of financial assets) and excessive executive compensation. To test whether its elaborate rules on securitization and compensation are likely to achieve this goal, we explore the connection between the two empirically. We find that commercial banks (regulated depositaries) that securitized paid their CEOs significantly more than banks that did not, or non-bank industrial firms, whether or not they securitized. This has important implications for Dodd-Frank, because its rules on securitization and compensation fail to account for the incentive effects of this sometimes risky form of transaction. The failure is problematic because banks that securitized—and the transactions themselves—performed especially poorly in the crisis, harming shareholders, creditors, and homeowners. Thus, those who created the worst securitizations were rewarded most handsomely. Dodd-Frank’s failure to see the pattern in securitization and compensation suggests that its efforts to align risk and reward are unlikely to succeed. Simpler, better-tailored regulation that accounts for the pattern we observe will more likely achieve Dodd-Frank’s goals of systemic stability and accountability