Compensation Regulation in Banking: Executive Director Behavior and Bank Performance after the EU Bonus Cap

IWH Discussion Papers 7/2018, Halle Institute for Economic Research (IWH)

97 Pages Posted: 25 Jan 2018 Last revised: 7 Dec 2020

See all articles by Stefano Colonnello

Stefano Colonnello

Ca Foscari University of Venice; Halle Institute for Economic Research

Michael Koetter

Halle Institute for Economic Research

Konstantin Wagner

Halle Institute for Economic Research

Date Written: December 7, 2020

Abstract

We investigate the (unintended) effects of bank executive compensation regulation. Capping the share of variable compensation spurred average turnover rates driven by CEOs at poorly performing banks. Other than that, banks' responses to raise fixed compensation sufficed to retain the vast majority of non-CEO executives and those at well performing banks. We fail to find evidence that banks with executives that are more affected by the bonus cap became less risky. In fact, numerous results indicate an increase of risk, even in its systemic dimension according to selected measures. The return component of bank performance appears to be unaffected by the bonus cap. Risk hikes are consistent with an insurance effect associated with raised the increase in fixed compensation of executives. The ability of the policy to enhance financial stability is therefore doubtful.

Keywords: Banks, Bonus Cap, Executive Compensation, Executive Turnover

JEL Classification: G21, G32, G34

Suggested Citation

Colonnello, Stefano and Koetter, Michael and Wagner, Konstantin, Compensation Regulation in Banking: Executive Director Behavior and Bank Performance after the EU Bonus Cap (December 7, 2020). IWH Discussion Papers 7/2018, Halle Institute for Economic Research (IWH), Available at SSRN: https://ssrn.com/abstract=3104869 or http://dx.doi.org/10.2139/ssrn.3104869

Stefano Colonnello

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Michael Koetter

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/en/about-the-iwh/people/detail/michael-koetter/

Konstantin Wagner (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

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