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Bank Bonus Pay as a Risk Sharing Contract

Author

Listed:
  • Matthias Efing

    (HEC Paris - Ecole des Hautes Etudes Commerciales, CESifo - Center for Economic Studies and Ifo for Economic Research - CESifo Group Munich)

  • Harald Hau
  • Patrick Kampkktter
  • Jean-Charles Rochet

    () (GREMAQ - Groupe de recherche en économie mathématique et quantitative - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRA - Institut National de la Recherche Agronomique - UT1 - Université Toulouse 1 Capitole)

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

  • Matthias Efing & Harald Hau & Patrick Kampkktter & Jean-Charles Rochet, 2018. "Bank Bonus Pay as a Risk Sharing Contract," Working Papers hal-01847442, HAL.
  • Handle: RePEc:hal:wpaper:hal-01847442
    DOI: 10.2139/ssrn.3202916
    Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-01847442
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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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