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Performance-based compensation vs. guaranteed compensation: contractual incentives and performance

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  • Barbosa, Klênio
  • Bucione, André Alvares Leite
  • Souza, André Portela Fernandes de

Abstract

Top management from retail banks must delegate authority to lower-level managers to operate branches and service centers. Doing so, they must navigate through conflicts of interest, asymmetric information and limited monitoring in designing compensation plans for such agents. Pursuant to this delegation, the banks adopt a system of performance targets and incentives to align the interests of senior management and unit managers. This paper evaluates the causal relationship between performance-based salaries and managers’ effective performance. We use a fixed effects estimator to analyze an unbalanced panel of data from one of the largest Brazilian retail banks during the period from January 2007 to June 2009. The results indicate that agents with guaranteed variable salary contracts demonstrate inferior performance compared with agents who have performance-based compensation packages. We conclude that there is a moral hazard that can be observed in the behavior of agents who are subject to guaranteed variable salary contracts.

Suggested Citation

  • Barbosa, Klênio & Bucione, André Alvares Leite & Souza, André Portela Fernandes de, 2013. "Performance-based compensation vs. guaranteed compensation: contractual incentives and performance," Textos para discussão 334, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    • Handle: RePEc:fgv:eesptd:334
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    Cited by:

    1. Jarque, Arantxa & Prescott, Edward Simpson, 2020. "Banker compensation, relative performance, and bank risk," Journal of the Japanese and International Economies, Elsevier, vol. 56(C).

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