Mandatory Deferral of Banker Compensation and Misallocation of Risky Projects

31 Pages Posted: 29 Jul 2012 Last revised: 30 Jul 2012

See all articles by Eberhard Feess

Eberhard Feess

Frankfurt School of Finance & Management gemeinnützige GmbH

Ansgar Wohlschlegel

Portsmouth Business School

Date Written: July 29, 2012

Abstract

We analyze the impact of mandatory deferral of bankers' compensation in a dynamic model with heterogenous banks. Shareholders are protected by limited liability, and hence implement excessive risk-taking of bank mangers by offering high powered incentive schemes. Deferral of payments reduces risk-shifting. However, deferred bonuses may backfire by distorting the allocation of risky projects within the banking sector. Moreover, we show that mandatory deferral of compensation is weakly welfare dominated by tighter capital requirements. For these two reasons, our model suggests that regulations on bankers' pay should only be considered if sufficiently tight capital requirements are infeasible.

Keywords: Deferred Bonuses, risk-shifting, financial crisis, Executive compensation

JEL Classification: G21, G28, J33, D62

Suggested Citation

Feess, Eberhard and Wohlschlegel, Ansgar, Mandatory Deferral of Banker Compensation and Misallocation of Risky Projects (July 29, 2012). Available at SSRN: https://ssrn.com/abstract=2118560 or http://dx.doi.org/10.2139/ssrn.2118560

Eberhard Feess

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Ansgar Wohlschlegel (Contact Author)

Portsmouth Business School ( email )

Portsmouth, PO1 3DE
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
91
Abstract Views
788
rank
315,725
PlumX Metrics