We investigate the (unintended) effects of bank executive compensation regulation. Capping the share of variable compensation did not induce an executive director exodus from EU banking because banks raised fixed compensation sufficiently to retain executives. However, risk-adjusted bank performance deteriorated, consistent with reduced incentives to exert effort and insurance effects associated with fixed compensation components. We also find that banks with directors that are more affected by the bonus cap exhibit more systemic as well as systematic risk. This result casts doubts on the effectiveness of the policy to achieve its aim to enhance financial stability.

Effectiveness and (In)Efficiencies of Compensation Regulation: Evidence from the EU Banker Bonus Cap

Stefano Colonnello
;
2018

Abstract

We investigate the (unintended) effects of bank executive compensation regulation. Capping the share of variable compensation did not induce an executive director exodus from EU banking because banks raised fixed compensation sufficiently to retain executives. However, risk-adjusted bank performance deteriorated, consistent with reduced incentives to exert effort and insurance effects associated with fixed compensation components. We also find that banks with directors that are more affected by the bonus cap exhibit more systemic as well as systematic risk. This result casts doubts on the effectiveness of the policy to achieve its aim to enhance financial stability.
File in questo prodotto:
File Dimensione Formato  
ckw_iwhdp.pdf

non disponibili

Descrizione: Articolo principale
Tipologia: Documento in Pre-print
Licenza: Accesso chiuso-personale
Dimensione 1.78 MB
Formato Adobe PDF
1.78 MB Adobe PDF   Visualizza/Apri

I documenti in ARCA sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/10278/3720074
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus ND
  • ???jsp.display-item.citation.isi??? ND
social impact