Business Economics (Principal Agent Theory) Essay

Business Economics (Principal Agent Theory) - Essay Example In fact analysts and the common people were surprised at the high risk undertaken by such big companies as Lehman Brothers Holdings Inc. In fact Bear Stearns Cos. was acquired by JP Morgan Chase & Co despite being the for the largest investment bank at one point of time. Experts have long criticized such lack of foresight in risk taking. However one important factor which are not often brought up in the analyses of this problem is the compensation of executives especially those which are incentive based. As analyzed by the experts, years before this crisis took place, the executives undertook the long-term economic stability as a gamble to play with and focused more on short-term financial gains. (Keller & Stocker, 2008) Understanding this issue might prevent future dangers and thus address the problem of bankruptcy by designing better compensation arrangements. The problem of compensation can be analyzed with the help of illustrating the case of Lehman Brothers and Bear Stearns as d epicted in the work â€Å"The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008† by Lucian A. Bebchuk, Alma Cohen and Holger Spamann in 2010. A panel of business and policy experts resented this lack of focus on long term worth and steadiness and the stress on short-term benefits. The National Association of Corporate Directors (NACD) suggested that the focus should lie on performance-oriented compensation rather than measuring the performance of the firm based upon stock prices. However the gap between such compensation and the value added to the American companies began to increase. In 2007 even when the mortgage crisis progressed further, the bonuses of Wall Street was at $33.2 billion, merely 2 percent below the high levels of 2006. The fall of Bear Stearns shows the problems brought about by the inclination towards short-term success. (Keller &