CEOs: It's not just about the money

(breakingviews.com) -- How important is pay to the average multi-millionaire investment bank executive?

Sure, it's right up there on the list of must-haves. And the ability to sell stock holdings they have accumulated might sometimes fuel excessive risk-taking, as a new Harvard study suggests. But money is hardly the only thing on Wall Street bosses' minds.

If it were, many of those who were on the bridge -- or playing bridge, in the case of Bear Stearns' Jimmy Cayne and Warren Spector -- would have long since left the business. John Mack, for example, could have retired and lived more than comfortably after leaving Morgan Stanley (MS, Fortune 500) in 2001. Yet he went on to run Credit Suisse (CS) and then returned to head Morgan Stanley.

The fact is, executives like the challenge, the power, the prestige and the battle to best their rivals -- and the amount they're paid is just one way that is expressed. And during booms and bubbles they often tend to believe that they know best.

Take Lehman Brothers, which had seemingly learned the need for solid risk management from two near-death experiences in the 1990s. By 2007, the firm's risk supremo was being excluded from key meetings, and those who disagreed with the aggressive commercial real estate strategy that helped bring the firm down were removed. That smacks more of hubris than of stock-market timing.

But the Harvard study does offer a reminder that while executives and Lehman and Bear lost a bundle when their firms collapsed, they also hung onto much of the fortune they had made beforehand because they were able to sell some of the stock holdings they had built up.

Under Wall Street's old partnership structures, selling equity was close to impossible until a partner retired. Now stock awards tend to become accessible a few years after they are made. The research paper fails to identify how much stock executives at Bear and Lehman sold to meet legitimate expenses like tax obligations. But it rightly notes that the ability to sell large chunks of stock and options could influence the business decisions executives make.

The Harvard authors suggest limiting all stock and options sales to 10% of an executive's holdings each year. And maybe shareholders and regulators should be thinking along these lines.

But guarding against Wall Street bosses' conviction that they're too smart to fail -- a conviction that can cost those same bosses whatever holdings they have left -- is far harder.