Yair Listokin has an interesting new paper proposing that managers of bankrupt firms be compensated with debt rather than equity. 

My question is this -- why not unfunded, unsecured deferred cash compensation?  It's economically similar to existing debt, but it could be designed to have a longer term, thereby putting the manager's incentives in the gray area between debt and equity.  This could mitigate what seems like a pro-liquidation bias in Listokin's proposal, while still largely aligning manager's incentives with unsecured creditors.  It might also mitigate the ex ante incentive to inefficiently enter bankruptcy. 

My broader point is that within the category of "debt compensation" there are a lot of different designs which could be used.  The longer the term, the more equity-like the instrument.  Giving the managers a "vertical strip" of unsecured debt is an improvement over the current system, perhaps, but why not refine it further?  I suspect that there is no single optimal solution, and that the right solution will vary from firm to firm. 

Interested readers should also check out David Skeel's Creditors' Ball paper.

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