Aligning Incentives at Systemically Important Financial Institutions

Baily, Martin N.; Campbell, John Y.; Cochrane, John H.; Diamond, Douglas W.; Duffie, Darrell; French, Kenneth R.; Kashyap, Anil K.; Mishkin, Frederic S.; Scharfstein, David S.; Shiller, Robert J.; Slaughter, Matthew J.; Shin, Hyun Song; Stulz, René M.

doi:10.2139/ssrn.2239895

Download This Paper

Open PDF in Browser

Add Paper to My Library

Aligning Incentives at Systemically Important Financial Institutions

Columbia Business School Research Paper No. 13-18

Fisher College of Business Working Paper

7 Pages Posted: 28 Mar 2013

See all articles by Martin N. Baily

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER)

Douglas W. Diamond

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Kenneth R. French

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Anil K. Kashyap

University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Frederic S. Mishkin

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

David S. Scharfstein

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Robert J. Shiller

Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance

Matthew J. Slaughter

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Hyun Song Shin

Bank for International Settlements (BIS)

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: March 25, 2013

Abstract

UBS recently announced it would pay part of the bonuses of 6,500 highly compensated employees with bonds that would be forfeited if the bank does not meet its capital requirements. This memo underscores the benefits of contingent deferred compensation and makes recommendations for how such compensation should be structured at systemically important institutions. We also revise our proposal for contingent convertible bonds, explaining how these hybrid bonds can be combined with better designs for deferred compensation to reduce the need for future bailouts.

Keywords: Bonus, compensation, contingent convertible bonds, capital, regulation, financial crisis

JEL Classification: G21, G28, G32, G34, G38

Suggested Citation: Suggested Citation

Baily, Martin N. and Campbell, John Y. and Cochrane, John H. and Diamond, Douglas W. and Duffie, James Darrell and French, Kenneth R. and Kashyap, Anil K. and Mishkin, Frederic S. and Scharfstein, David S. and Shiller, Robert J. and Slaughter, Matthew J. and Shin, Hyun Song and Stulz, Rene M., Aligning Incentives at Systemically Important Financial Institutions (March 25, 2013). Columbia Business School Research Paper No. 13-18, Fisher College of Business Working Paper, Available at SSRN: https://ssrn.com/abstract=2239895 or http://dx.doi.org/10.2139/ssrn.2239895