Effectiveness and (In)Efficiencies of Compensation Regulation: Evidence from the EU Banker Bonus Cap
70 Pages Posted: 25 Jan 2018 Last revised: 25 Nov 2018
Date Written: November 22, 2018
We investigate the (unintended) effects of bank executive compensation regulation. Capping the share of variable compensation did not induce an executive director exodus from EU banking because banks raised fixed compensation sufficiently to retain executives. However, risk-adjusted bank performance deteriorated, consistent with reduced incentives to exert effort and insurance effects associated with fixed compensation components. We also find that banks with directors that are more affected by the bonus cap exhibit more systemic as well as systematic risk. This result casts doubts on the effectiveness of the policy to achieve its aim to enhance financial stability.
Keywords: Banks, Bonus Cap, Executive Compensation, Executive Turnover
JEL Classification: G21, G32, G34
Suggested Citation: Suggested Citation