Bank Regulation, CEO Compensation, and Boards

57 Pages Posted: 11 Jul 2016

See all articles by Julian Kolm

Julian Kolm

University of Vienna - Department of Finance

Christian Laux

Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF); European Corporate Governance Institute (ECGI)

Gyongyi Loranth

University of Vienna; Centre for Economic Policy Research (CEPR)

Date Written: July 2016

Abstract

We analyze the limits of regulating bank CEO compensation to reduce risk shifting in the presence of an active board that retains the right to approve new investment strategies. Compensation regulation prevents overinvestment in strategies that increase risk, but it is ineffective in preventing underinvestment in strategies that reduce risk. The regulator optimally combines compensation and capital regulations. In contrast, if the board delegates the choice of strategy to the CEO, compensation regulation is sufficient to prevent both types of risk shifting. Compensation regulation increases shareholders' incentives to implement an active board, which reduces the effectiveness of compensation regulation.

Keywords: Bank Regulation; Executive Compensation; Corporate Governance

JEL Classification: G21, G28

Suggested Citation

Kolm, Julian and Laux, Christian and Loranth, Gyongyi, Bank Regulation, CEO Compensation, and Boards (July 2016). CEPR Discussion Paper No. DP11380, Available at SSRN: https://ssrn.com/abstract=2807831

Julian Kolm (Contact Author)

University of Vienna - Department of Finance

Oskar Morgenstern Platz 1
Vienna, 1090
Austria

Christian Laux

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Gyongyi Loranth

University of Vienna ( email )

Vienna

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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