The Economics of Deferral and Clawback Requirements

57 Pages Posted: 28 Jul 2020 Last revised: 16 Aug 2020

See all articles by Florian Hoffmann

Florian Hoffmann

Erasmus School of Economics

Roman Inderst

Goethe University Frankfurt

Marcus M. Opp

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Date Written: July 2020

Abstract

We analyze the effects of regulatory interference in compensation contracts, focusing on recent mandatory deferral and clawback requirements restricting (incentive) compensation of material risk-takers in the financial sector. Moderate deferral requirements have a robustly positive effect on equilibrium risk-management effort only if the bank manager's outside option is sufficiently high, else, their effectiveness depends on the dynamics of information arrival. Stringent deferral requirements unambiguously backfire. We characterize when regulators should not impose any deferral regulation at all, when it can achieve second-best welfare, when additional clawback requirements are of value, and highlight the interaction with capital regulation.

Keywords: bonus deferral, clawbacks, compensation regulation, moral hazard, principal-agent models with externalities, Short-termism

JEL Classification: D86, G21, G28

Suggested Citation

Hoffmann, Florian and Inderst, Roman and Opp, Marcus M., The Economics of Deferral and Clawback Requirements (July 2020). CEPR Discussion Paper No. DP15081, Available at SSRN: https://ssrn.com/abstract=3661424

Florian Hoffmann (Contact Author)

Erasmus School of Economics ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Roman Inderst

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60629
Germany
+49 (69) 798-34601 (Phone)
+49 (69) 798-35000 (Fax)

HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

Marcus M. Opp

Stockholm School of Economics - Department of Finance ( email )

SE-113 83 Stockholm
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

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