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Bank Bonus Pay as a Risk Sharing Contract

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  • Efing, Matthias

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  • Hau, Harald
  • Kampkötter, Patrick
  • Rochet, Jean-Charles

Abstract

We show that banker bonuses cannot be understood exclusively as incentive contracts, but also incorporate a significant risk sharing dimension between bank shareholders and bank employees. This contrasts with the conventional view whereby diversified shareholders fully insure risk averse employees. However, financial frictions imply that shareholder value is concave in a bank's cash reserves---making shareholders effectively risk averse. The optimal contract between shareholders and employees then involves some degree of risk sharing. Using extensive payroll data on 1.26 million bank employee years in the Austrian, German, and Swiss banking sectors, we show that the structure of bonus pay within and across banks is compatible with an economically significant risk sharing motive, but difficult to rationalize based on incentive theories of bonus pay only.

Suggested Citation

  • 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.
  • Handle: RePEc:ebg:heccah:1285
    DOI: 10.2139/ssrn.3202916
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    Keywords

    Bank compensation; risk sharing; bank risk; operating leverage;

    JEL classification:

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

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