Abstract

http://ssrn.com/abstract=1986484
 


 



Pay for Regulator Performance


M. Todd Henderson


University of Chicago - Law School

Frederick Tung


Boston University School of Law

January 16, 2012


Abstract:     
Few doubt that executive compensation arrangements encouraged the excessive risk taking by banks that led to the recent Financial Crisis. Accordingly, academics and lawmakers have called for the reform of banker pay practices. In this Article, we argue that regulator pay is to blame as well, and that fixing it may be easier and more effective than reforming banker pay. Regulatory failures during the Financial Crisis resulted at least in part from a lack of sufficient incentives for examiners to act aggressively to prevent excessive risk. Bank regulators are rarely paid for performance, and in atypical cases involving performance bonus programs, the bonuses have been allocated in highly inefficient ways. We propose that regulators, specifically bank examiners, be compensated with a debt-heavy mix of phantom bank equity and debt, as well as a separate bonus linked to the timing of the decision to take over a bank. Our pay-for-performance approach for regulators would help reduce the incidence of future regulatory failures.

Number of Pages in PDF File: 76

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Date posted: January 17, 2012  

Suggested Citation

Henderson, M. Todd and Tung, Frederick, Pay for Regulator Performance (January 16, 2012). Available at SSRN: http://ssrn.com/abstract=1986484 or http://dx.doi.org/10.2139/ssrn.1986484

Contact Information

M. Todd Henderson
University of Chicago - Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
773-834-4168 (Phone)
773-702-0730 (Fax)
Frederick Tung (Contact Author)
Boston University School of Law ( email )
765 Commonwealth Avenue
Boston, MA 02215
United States
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