How to Fix Bankers’ Pay

15 Pages Posted: 7 Sep 2010 Last revised: 11 Jun 2014

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Date Written: September 2010

Abstract

This essay – written for a special issue of the American Academy of Arts and Sciences’ Daedalus journal on lessons from the financial crisis – discusses how bankers’ pay should be fixed. I describe two distinct sources of risk-taking incentives: first, executives’ excessive focus on short-term results; and, second, their excessive focus on results for shareholders, which corresponds to a lack of incentives for executives to consider outcomes for other contributors of capital. I discuss how pay arrangements can be reformed to address each of these problems and conclude by examining the role that government should play in bringing about the needed reforms. The essay provides an accessible summary of the analysis developed in Bebchuk and Fried, “Paying for Long-Term Performance” (University of Pennsylvania Law Review, 2010, http://ssrn.com/abstract=1535355) and Bebchuk and Spamann, “Regulating Bankers’ Pay” (Georgetown Law Journal, 2010, http://ssrn.com/abstract=1410072).

Keywords: Financial Crisis, Executive Compensation, Banking, Risk-Taking

JEL Classification: G28, K23

Suggested Citation

Bebchuk, Lucian A., How to Fix Bankers’ Pay (September 2010). Daedalus, Vol. 139, No. 4, Fall 2010; Harvard Law School John M. Olin Center Discussion Paper No. 677. Available at SSRN: https://ssrn.com/abstract=1673250

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

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