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Convex payoffs: implications for risk-taking and financial reform

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  • Stephen Leroy
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    Abstract

    Financial executive pay is a convex function of profits if recipients get a greater increment in pay when returns are high as opposed to moderate, compared with when returns are moderate as opposed to low. Convex compensation packages give financial executives incentive to adopt risky investment projects, implement highly levered capital structures, and create new risk. Financial regulators may be able to enforce changes in compensation that would attenuate these adverse effects.

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    File URL: http://www.frbsf.org/publications/economics/letter/2010/el2010-30.html
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    File URL: http://www.frbsf.org/publications/economics/letter/2010/el2010-30.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of San Francisco in its journal FRBSF Economic Letter.

    Volume (Year): (2010)
    Issue (Month): Oct 4 ()
    Pages:

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    Handle: RePEc:fip:fedfel:y:2010:i:oct4:n:2010-30

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    Related research

    Keywords: Executives - Salaries;

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