Marginal Returns to Talent for Material Risk Takers in Banking
38 Pages Posted: 18 Nov 2020
Date Written: October 21, 2020
Economies of scale can explain compensation differentials over time, across firms of different size, different hierarchy-levels, and different industries. Consequently, the most talented individuals tend to match with the largest firms in industries where marginal returns to their talent are greatest. We explore a new dimension of this size-pay nexus by showing that marginal returns also differ across activities within firms and industries. Using hand-collected data on managers in European banks well below the level of executive directors, we find that the size-pay nexus is strongest for investment banking business units and for banks with a market-based business model. Thus, managerial compensation is most sensitive to size increases for activities that can easily be scaled up.
Keywords: Banks, Business Models, Marginal Returns to Talent
JEL Classification: G21, G24, G34
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