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

See all articles by Stefano Colonnello

Stefano Colonnello

Otto-von-Guericke-Universität Magdeburg; Halle Institute for Economic Research

Michael Koetter

Halle Institute for Economic Research

Konstantin Wagner

Halle Institute for Economic Research

Date Written: November 22, 2018

Abstract

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

Colonnello, Stefano and Koetter, Michael and Wagner, Konstantin, Effectiveness and (In)Efficiencies of Compensation Regulation: Evidence from the EU Banker Bonus Cap (November 22, 2018). Available at SSRN: https://ssrn.com/abstract=3104869 or http://dx.doi.org/10.2139/ssrn.3104869

Stefano Colonnello

Otto-von-Guericke-Universität Magdeburg

Universitaetsplatz 2
PSF 4120
Magdeburg, D-39106
Germany

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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