Wage of Failure: Executive Compensation at the Failed Icelandic Banks

Abstract

Gudrun Johnsen studies the relationship between the compensation systems used by the Icelandic banks and the decisions made by the management that, among other factors, led to the disaster. Evidence was found of misreporting of key performance indicators. Banks’ leadership teams in all three banks engaged in a large scale market manipulation as staff option awards were used as a vehicle to falsify equity through inappropriate hedging of options via off-balance sheet SPVs, in addition to excessive lending to staff and favoured customers to purchase banks’ stocks with insufficient collateral backing. This behaviour helped meet bonus targets, derail financial supervisors and the investing public, while bringing and keeping incentive pay, in the form of stock and options, in the money. Loan portfolios in the failed banks were marked by excessive risk taking and funds were tunnelled to related parties.