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Financial sector compensation and excess risk-taking—a consideration of the issues and policy lessons

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  • Krishnan Sharma
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    Abstract

    This paper surveys the ways that the structure and magnitude of financial sector compensation can generate incentives for excessive risk taking. It also highlights the underlying economic and institutional forces that have underpinned and sustained these pay structures, including aspects of corporate governance in financial institutions, regulatory capture by financial elites, the nature of the labour market for finance professionals and the extended economic boom of the 1990s and 2000s. The measures endorsed by the Financial Stability Board and the G20 for sound compensation practices do not go far enough in several areas; a broader set of measures need consideration.

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    File URL: http://www.un.org/esa/desa/papers/2012
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    Bibliographic Info

    Paper provided by United Nations, Department of Economics and Social Affairs in its series Working Papers with number 115.

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    Length: 17 pages
    Date of creation: Apr 2012
    Date of revision:
    Handle: RePEc:une:wpaper:115

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    Web page: http://www.un.org/en/development/desa/working-papers.html
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    Related research

    Keywords: financial market compensation; financial institutions; excess risk-taking; magnitude and structure of pay; governance of compensation; labour market mobility; regulation;

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    1. James Crotty, 2010. "The Bonus-Driven “Rainmaker” Financial Firm: How These Firms Enrich Top Employees, Destroy Shareholder Value and Create Systemic Financial Instability (revised)," Working Papers wp209_revised3, Political Economy Research Institute, University of Massachusetts at Amherst.
    2. Philippon, Thomas & Reshef, Ariell, 2009. "Wages and Human Capital in the U.S. Financial Industry: 1909-2006," CEPR Discussion Papers 7282, C.E.P.R. Discussion Papers.
    3. Kempf, Alexander & Ruenzi, Stefan & Thiele, Tanja, 2008. "Employment risk, compensation incentives and managerial risk taking: Evidence from the mutual fund industry," CFR Working Papers 07-02, University of Cologne, Centre for Financial Research (CFR).
    4. Jeffrey M. Lacker, 2009. "What Lessons Can We Learn from the Boom and Turmoil?," Cato Journal, Cato Journal, Cato Institute, vol. 29(1), pages 53-63, Winter.
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