Regulation of Compensation
109 Pages Posted: 28 Mar 2016 Last revised: 21 Jun 2017
Date Written: June 21, 2017
This paper studies the consequences of regulating executive compensation at financial institutions using the setting of the introduction of the UK Remuneration Code and the EU bonus cap regulation. Our analysis indicates that while the initial reaction to the Remuneration Code was positive, the stock market reacted negatively to the EU bonus cap regulation, suggesting that equity market investors perceive at least some costs from regulating executive compensation. In line with the intent of regulation, we also find that UK banks defer more bonuses and reduce risk. However, when compared to their US counterparts and other UK firms, UK banks also experience higher CEO turnover. Finally, we find that UK banks' compensation contracts become more complex after the regulation. Therefore, while regulation may have had the desired effect in terms of risk-taking, it may also have given rise to some unintended costs.
Keywords: Executive compensation, financial institutions; regulation, EU bonus caps, UK Remuneration Code
JEL Classification: G28, G34, G38
Suggested Citation: Suggested Citation