Deferred cash compensation: enhancing stability in the financial services industry

Employees in financial firms are compensated for creating value for the firm, but firms themselves also serve a public interest. This tension can lead to issues that could impose a significant risk to the firm and the public. The authors describe three channels through which deferred cash compensation can mitigate such risk: by promoting a conservative approach to risk, by inducing internal monitoring, and by creating a liquidity buffer. Ultimately, the net contribution of deferred cash pay to financial stability is the sum of the effects of the three channels. The authors argue that a deferred cash program can be designed to limit interference with labor mobility. Further, they underscore that such a scheme for banks is not punitive, particularly in a world of no bailouts. They offer a baseline conservative estimate for the size of the buffer for the largest U.S. banks. Finally, they discuss the potential effects of deferred cash pay on information production and sharing with regulators, and the intersection of deferred cash and enforcement.