Bank Bonus Pay as a Risk Sharing Contract

Efing, Matthias; Hau, Harald; Kampkötter, Patrick; Rochet, Jean-Charles

doi:10.2139/ssrn.3202916

Bank Bonus Pay as a Risk Sharing Contract

HEC Paris Research Paper No. FIN-2018-1285

50 Pages Posted: 29 Jun 2018 Last revised: 3 Jun 2020

See all articles by Matthias Efing

Matthias Efing

HEC Paris - Finance Department; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Harald Hau

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Patrick Kampkötter

University of Tuebingen - Department of Managerial Accounting

Jean-Charles Rochet

Swiss Finance Institute; University of Geneva - Geneva Finance Research Institute (GFRI); University of Zurich - Swiss Banking Institute (ISB)

There are 2 versions of this paper

Date Written: June 26, 2018

Abstract

We argue that risk sharing motivates the bank-wide structure of bonus pay. In the presence of financial frictions that make external financing costly, the optimal contract between shareholders and employees involves some degree of risk sharing whereby bonus pay partially absorbs earnings shocks. Using payroll data for 1.26 million employee-years in all functional divisions of Austrian, German, and Swiss banks, we uncover several empirical patterns in bonus pay that are difficult to rationalize exclusively with incentive theories of bonus pay---but support an important risk sharing motive.

Keywords: Bank compensation, risk sharing, bank risk, operating leverage

JEL Classification: G20, G21, D22

Suggested Citation: Suggested Citation

Efing, Matthias and Hau, Harald and Kampkötter, Patrick and Rochet, Jean-Charles, Bank Bonus Pay as a Risk Sharing Contract (June 26, 2018). HEC Paris Research Paper No. FIN-2018-1285, Available at SSRN: https://ssrn.com/abstract=3202916 or http://dx.doi.org/10.2139/ssrn.3202916