Bankers' Compensation and Prudential Supervision

RESEARCH HANDBOOK ON EXECUTIVE COMPENSATION, Jennifer Hill and Randall Thomas, eds., Edward Elgar Press, 2012

22 Pages Posted: 15 Apr 2011 Last revised: 28 Nov 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)

Date Written: April 14, 2011

Abstract

This is a Chapter contributing to the Research Handbook on Executive Compensation.

In the quest for possible causes of the recent financial crisis, commentators often argue that bank executives had poor incentives. Critics claim, in particular, that executive compensation was not properly aligned with long-term performance, while regulators seek ways to change practices in order to restore this alignment. At least two questions arise with respect to incentive practices. The first is whether executive compensation at banks before the crisis was predominantly short-term oriented. Academics and politicians answer this question differently. The latter argue, with the support of the media, that widespread short-term incentives to bank managers were at the root of the recent crisis. On the academic side of the current debate, recent empirical studies reveal no proof that short-term incentives led to excessive risks. The second question is whether banking regulation should cover compensation arrangements, either by mandating pay structures or by requiring their adjustment in order to avoid excessive risk taking. I submit that regulators should not replace boards in setting pay structures and that regulatory intervention concerning executive pay at banks should be limited in scope, so as to maintain the flexibility of executive pay arrangements.

I examine the Principles for Sound Compensation Practices and their Implementation Standards issued in 2009 by the FSB and critically assess the same in light of the preceding discussion. The Chapter concludes with some remarks on the case for regulating bankers’ pay.

Keywords: Executive remuneration, international principles and standards, corporate governance, financial institutions, banks

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

Suggested Citation

Ferrarini, Guido, Bankers' Compensation and Prudential Supervision (April 14, 2011). RESEARCH HANDBOOK ON EXECUTIVE COMPENSATION, Jennifer Hill and Randall Thomas, eds., Edward Elgar Press, 2012. Available at SSRN: https://ssrn.com/abstract=1809789

Guido Ferrarini (Contact Author)

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

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