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Leverage, Bank Employee Compensation and Institutions

Author

Listed:
  • Bertay, Ata

    (Tilburg University, Center For Economic Research)

  • Uras, Burak

    (Tilburg University, Center For Economic Research)

Abstract

This paper investigates the empirical relationship between financial structure and employee compensation in the banking industry. Using an international panel of banks, we show that well-capitalized banks pay higher wages to their employees. Our results are robust to changes in measurement, model specification and estimation methods. In order to account for the positive association between bank capital and employee compensation, we illustrate a stylized 3-period model and show that well-capitalized banks have incentives to pay higher wages to induce monitoring. Such monitoring rents of employees at capitalized banks are expected to be higher in societies with weak institutions. Further empirical analysis shows that the weaker is institutional quality of a country the stronger is the positive relationship between bank capital and wages - supporting our theoretical conjectures. High compensations in the financial industry received increasing criticism over the course of years following the great recession, whereas capitalization of banks has been encouraged. Our paper is the first to highlight that there is an empirically visible trade-off between the two and that institutions strongly interact with this relationship.

Suggested Citation

  • Bertay, Ata & Uras, Burak, 2016. "Leverage, Bank Employee Compensation and Institutions," Discussion Paper 2016-004, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:7a3a275f-818c-40c7-9658-4a2923b1f935
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    bank financial structure; wage determination; human capital;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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