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Determinants of the use of financial incentives in investment banking

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Author Info
David Nash
Abstract

This paper examines the use of incentive pay schemes within the financial services sector in London. Various theories of wage determination are reviewed with particular attention placed on the principal-agent literature as a framework for analysing the use of incentive pay. This is combined with case study interviews and a number of hypotheses regarding the use of bonuses. Quantitative analysis of a detailed industry-wide survey validates the hypothesis that those occupations where output is easily identifiable receive higher bonus pay. The proximity of an occupation to the revenue generating activity within the organisation is also found to be significant in determining bonus levels, as is job grade within the organisation. The paper concludes that principal-agent theories of wage determination are useful in understanding the use of bonus pay in the City, but need to be modified to take account of particular institutional characteristics, in particular the power of individual agents.

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Paper provided by ESRC Centre for Business Research in its series ESRC Centre for Business Research - Working Papers with number wp256.

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Date of creation: Mar 2003
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Handle: RePEc:cbr:cbrwps:wp256

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Related research
Keywords: Incentive pay; principal-agent theory; investment banking;

Find related papers by JEL classification:
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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