Download This PaperBank Bonus Pay as a Risk Sharing Contract
69 Pages Posted: 29 Jun 2018 Last revised: 26 Oct 2021
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Bank Bonus Pay as a Risk Sharing Contract
Bank Bonus Pay as a Risk Sharing Contract
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 negative 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
Matthias Efing (Contact Author)
HEC Paris - Finance Department ( email )
France
(++33)695646755 (Phone)
HOME PAGE: http://matthiasefing.com/
CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )
Poschinger Str. 5
Munich, DE-81679
Germany
Swiss Finance Institute
Switzerland
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Jean-Charles Rochet
Swiss Finance Institute ( email )
c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland