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Determinants of the use of financial incentives in investment banking

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  • David Nash

Abstract

This paper examines the use of incentive pay schemes within the financial services sector in London. Various theories of wage determination are reviewed with particular attention placed on the principal-agent literature as a framework for analysing the use of incentive pay. This is combined with case study interviews and a number of hypotheses regarding the use of bonuses. Quantitative analysis of a detailed industry-wide survey validates the hypothesis that those occupations where output is easily identifiable receive higher bonus pay. The proximity of an occupation to the revenue generating activity within the organisation is also found to be significant in determining bonus levels, as is job grade within the organisation. The paper concludes that principal-agent theories of wage determination are useful in understanding the use of bonus pay in the City, but need to be modified to take account of particular institutional characteristics, in particular the power of individual agents.

Suggested Citation

  • David Nash, 2003. "Determinants of the use of financial incentives in investment banking," Working Papers wp256, Centre for Business Research, University of Cambridge.
    • Handle: RePEc:cbr:cbrwps:wp256
    Note: PRO-2
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    File URL: https://www.jbs.cam.ac.uk/cbrwp256/
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    Cited by:

    1. Ivana Marinovic Matovic & Miloš Pavlovic, 2020. "Key Performance Indicators as Determinants of Managerial Compensation," Proceedings of the 18th International RAIS Conference, August 17-18, 2020 004im, Research Association for Interdisciplinary Studies.
    2. Christian Grund & Tanja Hofmann, 2019. "The dispersion of bonus payments within and between firms," Journal of Business Economics, Springer, vol. 89(4), pages 417-445, June.
    3. Grund, Christian & Walter, Tanja, 2013. "Management Compensation and the Economic Crisis: Longitudinal Evidence from the German Chemical Sector," IZA Discussion Papers 7435, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Incentive pay; principal-agent theory; investment banking;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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