Economics, Politics, and the International Principles for Sound Compensation Practices: An Analysis of Executive Pay at European Banks

Vanderbilt Law Review, Vol. 62, No. 2, p. 431, 2011

ECGI - Law Working Paper No. 169/2010

Paper presented at the International Risk Management Conference, VU Amsterdam, June 2011

72 Pages Posted: 13 Nov 2010 Last revised: 23 Jun 2011

See all articles by Guido Ferrarini

Guido Ferrarini

University of Genoa - Law Department and Centre for Law and Finance; European Corporate Governance Institute (ECGI)

Maria Cristina Ungureanu

Sodali; Genoa Centre for Law and Finance, University of Genoa; European Corporate Governance Institute (ECGI)

Date Written: March 2011

Abstract

In this Article we submit that the compensation structures at banks before the financial crisis were not necessarily flawed and that recent reforms in this area largely reflect already existing best practices. In Part I we review recent empirical studies on corporate governance and executive pay at banks and suggest that there is no strong support for regulating bankers’ compensation structures. We also argue that detailed regulation of incentives would subtract essential decisionmaking powers from boards of directors and make compensation structures too rigid. In Part II we note that political support for regulating bankers’ pay has been strong and led to reforms promoting long-term incentives to executives on the assumption that short-term incentives were a cause of the crisis. The Financial Stability Board Principles for Sound Compensation Practices (the “Principles”) follow this trend, at the same time representing a political compromise between the various interest groups concerned. They pick up traditional compensation criteria from pre-crisis best practices, adapting them to the post-crisis setting, while leaving some flexibility in pay structures. We suggest that a certain degree of flexibility should be kept when implementing the Principles in national jurisdictions. In Part III we analyze the regulatory developments concerning executive pay at banks in Europe and find variations in the implementation of the Principles. We also show that remuneration policies at large European banks are converging towards the international Principles, while varying in the implementation of individual standards. However, recent EU reforms may change the situation considerably by imposing detailed requirements as to pay structures in the financial sector.

Keywords: Executive Remuneration, Corporate Governance, Banks, Financial Crisis, Prudential Regulation, Supervision

JEL Classification: G20, G21, G28, G30, G32, G34, G38, K22, K31, M12

Suggested Citation

Ferrarini, Guido and Ungureanu, Maria Cristina, Economics, Politics, and the International Principles for Sound Compensation Practices: An Analysis of Executive Pay at European Banks (March 2011). Vanderbilt Law Review, Vol. 62, No. 2, p. 431, 2011; ECGI - Law Working Paper No. 169/2010; Paper presented at the International Risk Management Conference, VU Amsterdam, June 2011. Available at SSRN: https://ssrn.com/abstract=1707344

Guido Ferrarini

University of Genoa - Law Department and Centre for Law and Finance ( email )

Via Balbi, 22
16126 Genova, 16100
Italy
+39 010 209 9894 (Phone)
+39 010 209 9890 (Fax)

HOME PAGE: http://www.clfge.org

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Maria Cristina Ungureanu (Contact Author)

Sodali ( email )

9 West 57th Street
26th Floor
New York, NY 10019
United States

Genoa Centre for Law and Finance, University of Genoa ( email )

Genova
Italy

HOME PAGE: http://www.clfge.org

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
Brussels, B-1050
Belgium

HOME PAGE: http://www.ecgi.org

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