Leverage, Bank Employee Compensation and Institutions

CentER Discussion Paper Series No. 2016-004

European Banking Center Discussion Paper Series No. 2016-001

37 Pages Posted: 20 Jan 2016

See all articles by Ata Can Bertay

Ata Can Bertay

Sabancı University; Tilburg University - European Banking Center

Burak Uras

Tilburg University - Center for Economic Research (CentER); Tilburg University - Department of Economics

Date Written: January 19, 2016

Abstract

This paper investigates the empirical relationship between financial structure and employee compensation in the banking industry. Using an international panel of banks, we show that well-capitalized banks pay higher wages to their employees. Our results are robust to changes in measurement, model specification and estimation methods. In order to account for the positive association between bank capital and employee compensation, we illustrate a stylized 3-period model and show that well-capitalized banks have incentives to pay higher wages to induce monitoring. Such monitoring rents of employees at capitalized banks are expected to be higher in societies with weak institutions. Further empirical analysis shows that the weaker is institutional quality of a country the stronger is the positive relationship between bank capital and wages -- supporting our theoretical conjectures. High compensations in the financial industry received increasing criticism over the course of years following the great recession, whereas capitalization of banks has been encouraged. Our paper is the first to highlight that there is an empirically visible trade-off between the two and that institutions strongly interact with this relationship.

Keywords: Bank Financial Structure, Wage Determination, Human Capital

JEL Classification: G3, G21, J24, J31

Suggested Citation

Bertay, Ata Can and Uras, Burak R., Leverage, Bank Employee Compensation and Institutions (January 19, 2016). CentER Discussion Paper Series No. 2016-004, European Banking Center Discussion Paper Series No. 2016-001, Available at SSRN: https://ssrn.com/abstract=2718184 or http://dx.doi.org/10.2139/ssrn.2718184

Ata Can Bertay (Contact Author)

Sabancı University ( email )

Orhanli
Istanbul, Tuzla 34956
Turkey

HOME PAGE: http://www.atabertay.com

Tilburg University - European Banking Center ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

Burak R. Uras

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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