Some Banks’ Pay Reform May Show the Way

Abstract

The way some financial institutions are implementing compensation reforms suggests a strengthening alignment of interest among executives, their firms, and wider society.

First, through mandatory deferral, payment in equity, and other mechanisms, bankers’ pay is more exposed to longer-term performance outcomes of their firms. Second, performance and payouts are increasingly evaluated through a multi-year lens. Third, risk considerations are now better incorporated into compensation arrangements.

Although problematic remuneration practices remain, the progressive steps taken by some banks provide a reason for optimism that their compensation arrangements will not pose the same danger to systemic stability as in years past.

Keywords: Compensation, Financial Institutions

JEL Classification: G28, G29, G34, M52