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Effectiveness and (in)efficiencies of compensation regulation: Evidence from the EU banker bonus cap


  • Colonnello, Stefano
  • Koetter, Michael
  • Wagner, Konstantin


We investigate the (unintended) effects of bank executive compensation regulation. Capping the share of variable compensation did not induce an executive director exodus from EU banking because banks raised fixed compensation sufficiently to retain executives. However, risk-adjusted bank performance deteriorated, consistent with reduced incentives to exert effort and insurance effects associated with fixed compensation components. We also find that banks with directors that are more affected by the bonus cap exhibit more systemic as well as systematic risk. This result casts doubts on the effectiveness of the policy to achieve its aim to enhance financial stability.

Suggested Citation

  • Colonnello, Stefano & Koetter, Michael & Wagner, Konstantin, 2018. "Effectiveness and (in)efficiencies of compensation regulation: Evidence from the EU banker bonus cap," IWH Discussion Papers 7/2018, Halle Institute for Economic Research (IWH).
  • Handle: RePEc:zbw:iwhdps:72018

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    References listed on IDEAS

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    Cited by:

    1. Matthias Efing & Harald Hau & Patrick Kampkötter & Jean-Charles Rochet, 2019. "Bank Bonus Pay as a Risk Sharing Contract," CESifo Working Paper Series 7495, CESifo.

    More about this item


    banks; bonus cap; executive compensation; executive turnover;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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