In their paper, Inside Debt, Bank Default Risk and Performance during the Crisis, Bennett, Guntay, and Unal explore the impact that the structure of executives’ compensation packages, particularly those of chief executive officers, can have on the default risk and the performance of financial institutions during financial crises. Specifically, they focus on bank holding companies during the recent global financial crisis and the use of inside debt and inside equity as compensation.

This is a particularly interesting study, especially in light of recent financial turmoil. Since the onset of the crisis, executive compensation via incentive-based remuneration has come under close scrutiny. An example of this increased focus is demonstrated through the fact that the recent Dodd-Frank Act acknowledges that incentive-based compensation has a correlation to lower levels of risk aversion. Bennett et al. choose to explore inside debt (such as pension benefits) as a form of compensation as opposed to inside equity (such as stock options), which has already garnered much attention. One of their primary findings from exploring the use of inside debt is that bank holding companies that chose to compensate using more inside debt than inside equity weathered the crisis better than those that did not. This indicates that using inside debt can aid in the mitigation of a bank holding company’s default risk. A final significant finding to take away from this study is that it is important to consider various forms of employee compensation and that it can be beneficial to align the interests of executives with those of debt holders, not just shareholders.