Risk Managers in Banks
66 Pages Posted: 18 Sep 2020 Last revised: 18 Oct 2021
Date Written: September 30, 2020
How do banks remunerate risk managers? Studying 127 banks during the years 2003 to 2007, we show that the performance pay of risk managers is positively aligned with the performance pay of traders and loan officers. A risk manager receives a 13.6 to 33.5 Cents higher bonus when the average bonus paid in front offices increases by one Euro. Labor markets or risk-sharing among employees do not fully explain this finding. Risk managers whose remuneration is strongly aligned with performance pay in front offices work for banks that did better in the crisis of 2008-2009. These findings are consistent with predictions derived from a model of efficient risk manager compensation.
Keywords: risk management, governance, optimal contracts, pay-for-performance, risk-taking
JEL Classification: G20, G21, J3
Suggested Citation: Suggested Citation