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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 - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)

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
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    Cited by:

    1. Edward D. Van Wesep & Brian Waters, 2022. "Bonus Season: A Theory of Periodic Labor Markets and Coordinated Bonuses," Management Science, INFORMS, vol. 68(7), pages 5464-5492, July.
    2. Bertay, Ata Can & Carreño, José & Huizinga, Harry & Uras, Burak & Vellekoop, Nathanael, 2022. "Technological change and the finance wage premium," SAFE Working Paper Series 361, Leibniz Institute for Financial Research SAFE.
    3. Wagner, Konstantin, 2020. "Competition, cost structure, and labour leverage: Evidence from the U.S. airline industry," IWH Discussion Papers 21/2020, Halle Institute for Economic Research (IWH).
    4. Michael Haylock, 2022. "Distributional differences in the time horizon of executive compensation," Empirical Economics, Springer, vol. 62(1), pages 157-186, January.
    5. Ben Le & Nischala Reddy & Paula Hearn Moore, 2025. "The Determinants of CEO Compensation in the Banking Sector: A Comparison of the Influence of Cross-Listing and Loan Growth in Developed Versus Developing Countries," JRFM, MDPI, vol. 18(3), pages 1-17, March.

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    Keywords

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    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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