Regulation of Compensation and Systemic Risk: Evidence from the UK

This paper studies the consequences of regulating executive compensation at financial institutions by examining the introduction of the UK Remuneration Code in 2010, which aimed to change the decision-making horizon and risk-taking incentives of bank executives. We find that, although both banks and non-banks show increased contribution and sensitivity to systemic risk in the UK post-2010, this increase is lower for UK banks, in line with the intent of the regulation. However, UK banks also experience higher unforced CEO turnover when compared to other UK firms. Therefore, while the regulation may have had the desired effect on systemic risk, it may also have given rise to some unintended consequences.

Keywords: Executive compensation; financial institutions; regulation; systemic risk; UK Remuneration Code

JEL Classification: G21, G28, G34, G38

Suggested Citation: Suggested Citation

Kleymenova, Anya V. and Tuna, Ayse Irem, Regulation of Compensation and Systemic Risk: Evidence from the UK (February 16, 2021). Chicago Booth Research Paper No. 16-07, Available at SSRN: https://ssrn.com/abstract=2755621 or http://dx.doi.org/10.2139/ssrn.2755621