Bank Bonus Pay as a Risk Sharing Contract

41 Pages Posted: 20 Nov 2018 Last revised: 27 Nov 2018

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

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

Date Written: November 15, 2018

Abstract

We argue that risk sharing motivates the bank-wide structure of bonus pay. In the presence of fi nancial frictions that make external fi nancing 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 with incentive theories of bonus pay-but support an important risk sharing motive. In particular, bonuses respond to performance shocks that are outside the control of employees because they originate in other bank divisions or even outside the bank.

Keywords: banker compensation, risk sharing, bonus pay, operating leverage

JEL Classification: G20, G21, D22

Suggested Citation

Efing, Matthias and Hau, Harald and Kampkötter, Patrick and Rochet, Jean-Charles, Bank Bonus Pay as a Risk Sharing Contract (November 15, 2018). Swiss Finance Institute Research Paper No. 18-72. Available at SSRN: https://ssrn.com/abstract=3287672 or http://dx.doi.org/10.2139/ssrn.3287672

Matthias Efing

HEC Paris - Finance Department ( email )

France
(++33)695646755 (Phone)

HOME PAGE: http://matthiasefing.com/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Harald Hau (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Patrick Kampkötter

University of Tuebingen - Department of Managerial Accounting ( email )

Germany

Jean-Charles Rochet

GFRI, University of Geneva ( email )

102 Bd Carl-Vogt
Genève, CH - 1205
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

University of Zurich - Swiss Banking Institute (ISB) ( email )

Plattenstrasse 14
CH-8032 Zurich, Zurich 8032
Switzerland

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