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Incentive pay and bank risk-taking: Evidence from Austrian, German, and Swiss banks

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  • Efing, Matthias
  • Hau, Harald
  • Kampkötter, Patrick
  • Steinbrecher, Johannes

Abstract

We use payroll data in the Austrian, German, and Swiss banking sector to identify incentive pay in the critical banking segments of treasury/capital market management and investment banking for 67 banks. We document an economically significant correlation of incentive pay with both the level and volatility of bank trading income—particularly for the pre-crisis period 2003–2007, in which incentive pay was strongest. This result is robust if we instrument the bonus share in the capital market divisions with the strength of incentive pay in unrelated bank divisions like retail banking. Moreover, pre-crisis incentive pay appears too strong for an optimal trade-off between trading income and risk, which maximizes the net present value of trading income. Further analyses indicate that the bonus moderation during the crisis has removed excessive pre-crisis incentive pay.

Suggested Citation

  • Efing, Matthias & Hau, Harald & Kampkötter, Patrick & Steinbrecher, Johannes, 2015. "Incentive pay and bank risk-taking: Evidence from Austrian, German, and Swiss banks," Journal of International Economics, Elsevier, vol. 96(S1), pages 123-140.
  • Handle: RePEc:eee:inecon:v:96:y:2015:i:s1:p:s123-s140
    DOI: 10.1016/j.jinteco.2014.12.006
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    2. Jason Allen & James R. Thompson, 2016. "Capital Structure, Pay Structure and Job Termination," Staff Working Papers 16-12, Bank of Canada.
    3. Allen, Jason & Thompson, James R., 2019. "Variable pay: Is it for the worker or the firm?," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 551-566.
    4. Cerasi, Vittoria & Deininger, Sebastian M. & Gambacorta, Leonardo & Oliviero, Tommaso, 2020. "How post-crisis regulation has affected bank CEO compensation," Journal of International Money and Finance, Elsevier, vol. 104(C).
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    6. Hamid Boustanifar & Everett Grant & Ariell Reshef, 2018. "Wages and Human Capital in Finance: International Evidence, 1970–2011 [Financial reform: what shakes it? What shapes it?]," Review of Finance, European Finance Association, vol. 22(2), pages 699-745.
    7. Axel Wieneke, 2016. "Better Financial Innovation via Innovative Finance of Supervisors," Economic Papers, The Economic Society of Australia, vol. 35(1), pages 16-23, March.
    8. Gietl, Daniel, 2018. "Overconfidence and Bailouts," Rationality and Competition Discussion Paper Series 132, CRC TRR 190 Rationality and Competition.
    9. Sorravich Kingsuwankul & Chloe Tergiman & Marie Claire Villeval, 2023. "Why do oaths work? Image concerns and credibility in promise keeping," Working Papers hal-04209489, HAL.
    10. Larry D. Wall, 2020. "Is stricter regulation of incentive compensation the missing piece?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(1), pages 82-94, March.
    11. Aptus, Elias & Britz, Volker & Gersbach, Hans, 2014. "On the economics of crisis contracts," CFS Working Paper Series 453, Center for Financial Studies (CFS).
    12. Efing, Matthias & Hau, Harald & Kampkötter, Patrick & Rochet, Jean-Charles, 2018. "Bank Bonus Pay as a Risk Sharing Contract," HEC Research Papers Series 1285, HEC Paris.
    13. Stieglitz, Moritz & Wagner, Konstantin, 2020. "Marginal returns to talent for material risk takers in banking," IWH Discussion Papers 20/2020, Halle Institute for Economic Research (IWH).
    14. Thanassoulis, John & Morrison, Alan, 2017. "Ethical standards and cultural assimilation in financial services," CEPR Discussion Papers 12060, C.E.P.R. Discussion Papers.
    15. Gietl, Daniel & Haufler, Andreas, 2018. "Bonus taxes and international competition for bank managers," European Economic Review, Elsevier, vol. 110(C), pages 41-60.
    16. Matthias Efing & Harald Hau & Patrick Kampkötter & Johannes Steinbrecher, 2015. "Die Dosis macht das Gift – eine Analyse zum Einfluss von Bonuszahlungen auf die Profitabilität und das Risiko von Banken," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 68(03), pages 23-31, February.
    17. Colonnello, Stefano & Koetter, Michael & Wagner, Konstantin, 2023. "Compensation regulation in banking: Executive director behavior and bank performance after the EU bonus cap," Journal of Accounting and Economics, Elsevier, vol. 76(1).
    18. Udo Milkau, 2017. "Risk Culture during the Last 2000 Years—From an Aleatory Society to the Illusion of Risk Control," IJFS, MDPI, vol. 5(4), pages 1-20, December.
    19. Surajeet Chakravarty & Sumedh Dalwai & Pradeep Kumar, 2020. "Incentives and Performance of Agents in a Microfinance Bank," Discussion Papers 2002, University of Exeter, Department of Economics.
    20. Elias Aptus & Volker Britz & Hans Gersbach, 2020. "Crisis Contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(1), pages 121-164, July.
    21. Christina Atanasova & Mingxin Li & Yevgeny Mugerman & Mehrdad Rastan, 2019. "Government guarantees and the risk-taking of financial institutions: evidence from a regulatory experiment," Journal of Asset Management, Palgrave Macmillan, vol. 20(6), pages 476-492, October.
    22. Hamid Boustanifar & Everett Grant & Ariell Reshef, 2016. "Wages and human capital in finance: international evidence, 1970-2005," Globalization Institute Working Papers 266, Federal Reserve Bank of Dallas.

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    More about this item

    Keywords

    Trading income; Bank risk; Incentive pay; Bonus payments;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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