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Bankers' Pay Structure And Risk

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  • John Thanassoulis

Abstract

This paper studies the contracting problem between banks and their bankers, embedded in a competitive labour market for banker talent. To motivate effort banks must use some variable remuneration. Such remuneration introduces a risk-shifting problem by creating incentives to inflate early earnings: to manage this some bonus pay is optimally deferred. As competition between banks for bankers rises it becomes more expensive to manage the risk-shifting problem than the moral hazard problem. If competition grows strong enough, contracts which permit some risk-shifting become optimal. Empirically I demonstrate that balance sheets have changed in a manner which triggers this mechanism.

Suggested Citation

  • John Thanassoulis, 2011. "Bankers' Pay Structure And Risk," Economics Series Working Papers 545, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:545
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper545.pdf
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    References listed on IDEAS

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    1. Xavier Gabaix & Augustin Landier, 2008. "Why has CEO Pay Increased So Much?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 49-100.
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    5. Pozsar, Zoltan & Adrian, Tobias & Ashcraft, Adam B. & Boesky, Hayley, 2013. "Shadow banking," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-16.
      • Zoltan Pozsar & Tobias Adrian & Adam B. Ashcraft & Hayley Boesky, 2010. "Shadow banking," Staff Reports 458, Federal Reserve Bank of New York.
    6. Jeremy Bulow & Jonathan Levin, 2006. "Matching and Price Competition," American Economic Review, American Economic Association, vol. 96(3), pages 652-668, June.
    7. Ernst-Ludwig von Thadden, 1995. "Long-Term Contracts, Short-Term Investment and Monitoring," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 557-575.
    8. Peyton Young & Dean P Foster, 2008. "The Hedge Fund Game," Economics Papers 2008-W01, Economics Group, Nuffield College, University of Oxford.
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    12. John Thanassoulis, 2011. "The Case For Intervening In Bankers' Pay," Economics Series Working Papers 532, University of Oxford, Department of Economics.
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    Cited by:

    1. Bijlsma, Michiel & Boone, Jan & Zwart, Gijsbert, 2012. "Competition for traders and risk," CEPR Discussion Papers 8816, C.E.P.R. Discussion Papers.
    2. Besley, Timothy & Ghatak, Maitreesh, 2011. "Taxation and regulation of bonus pay," LSE Research Online Documents on Economics 58192, London School of Economics and Political Science, LSE Library.
    3. John Thanassoulis, 2013. "Industry Structure, Executive Pay, and Short-Termism," Management Science, INFORMS, vol. 59(2), pages 402-419, June.

    More about this item

    Keywords

    Risk-shifting; Moral hazard; Incentives; Bonuses; Banks; Bankers' pay;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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