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Compensation and risk incentives in banking and finance

Author

Listed:
  • Cai, Jian
  • Cherny, Kent
  • Milbourn, Todd

Abstract

We review why executive compensation contracts are often structured the way they are, analyze risk incentives stemming from various pay schemes, and examine the tendency of the banking and finance industry toward excessive risk-taking. Studying the typical executive pay structures in banking and finance before the financial crisis reveals some potentially problematic practices. These practices may have encouraged “short-termism” and excessive risk-taking, which are two behaviors bank regulators aim to prevent with their recently issued guidance on incentive compensation.

Suggested Citation

  • Cai, Jian & Cherny, Kent & Milbourn, Todd, 2010. "Compensation and risk incentives in banking and finance," Economic Commentary, Federal Reserve Bank of Cleveland, issue Sep.
  • Handle: RePEc:fip:fedcec:y:2010:i:sep14:n:2010-13
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    Citations

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    Cited by:

    1. Acharya, Viral & Litov, Lubomir P. & Sepe, Simone M., 2014. "Seeking Alpha, Taking Risk: Evidence from Non-executive Pay in U.S. Bank Holding Companies," Working Papers 13-18, University of Pennsylvania, Wharton School, Weiss Center.
    2. Boris Cournède & Oliver Denk & Peter Hoeller, 2015. "Finance and Inclusive Growth," OECD Economic Policy Papers 14, OECD Publishing.

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