Regulation of Compensation and Systemic Risk: Evidence from the UK
70 Pages Posted: 28 Mar 2016 Last revised: 23 Oct 2018
Date Written: October 22, 2018
This paper studies the consequences of regulating executive compensation at financial institutions by examining the introduction of the UK Remuneration Code, which aimed to change the decision-making horizon and risk-taking incentives. We find that, in line with the intent of the regulation, UK banks contribute less to systemic risk and are less sensitive to systemic risk after the implementation of the Code. Affected UK banks have also become less risky. However, when compared to their US counterparts and other UK firms, UK banks also experience higher CEO turnover. Therefore, while the regulation may have had the desired effect on systemic risk and on incentives to take risk, it may also have given rise to some unintended consequences.
Keywords: Executive compensation, financial institutions; regulation, EU bonus caps, UK Remuneration Code
JEL Classification: G28, G34, G38
Suggested Citation: Suggested Citation