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Bank Bonus Pay as a Risk Sharing Contract

Author

Listed:
  • Matthias Efing
  • Harald Hau
  • Patrick Kampkötter
  • Jean-Charles Rochet

Abstract

We argue that risk sharing motivates the bank-wide structure of bonus pay. In the presence of financial frictions that make external financing costly, the optimal contract between shareholders and employees involves some degree of risk sharing whereby bonus pay partially absorbs earnings shocks. Using payroll data for 1:26 million employee-years in all functional divisions of Austrian, German, and Swiss banks, we uncover several empirical patterns in bonus pay that are difficult to rationalize with incentive theories of bonus pay - but support an important risk sharing motive. In particular, bonuses respond to performance shocks that are outside the control of employees because they originate in other bank divisions or even outside the bank.

Suggested Citation

  • Matthias Efing & Harald Hau & Patrick Kampkötter & Jean-Charles Rochet, 2019. "Bank Bonus Pay as a Risk Sharing Contract," CESifo Working Paper Series 7495, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_7495
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    References listed on IDEAS

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    More about this item

    Keywords

    banker compensation; risk sharing; bonus pay; operating leverage;

    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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