Summary of Incentive Pay and Bank Risk-Taking

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Incentive Pay and Bank Risk-Taking summary
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7

Qualities

  • Comprehensive
  • Analytical
  • Innovative

Recommendation

Banks enjoy a unique position in the capitalist economy: As vital financial infrastructure, they are subject to rules and scrutiny, and they benefit from explicit and implicit government guarantees. As businesses, they must generate good returns for shareholders. But how good, and at what cost to society? This statistically complex and perhaps overly ambitious study by economists Matthias Efing, Harald Hau, Patrick Kampkötter and Johannes Steinbrecher seeks a connection between big bonuses and bank risk taking. Though the authors themselves recognize the inherent shortcomings as well as the socio-political aspects of their work, getAbstract nonetheless suggests their report to bank executives and human resources professionals for its contribution to the study of human economic behavior.

About the Authors

Matthias Efing is a research assistant and Harald Hau is a professor of economics at the University of Geneva. Patrick Kampkötter is a postdoctoral researcher at the University of Cologne, and Johannes Steinbrecher is a researcher at the CESifo Institute Dresden.

 

Summary

The aftermath of the 2008 financial crisis has spawned serious debate about the links between employee bonus payments and excessive risk taking by banks. Many believe high pre-2008 incentive pay triggered irresponsible behavior that caused the crisis. Due to reporting limitations, most studies have focused on compensation and bonuses at the executive and board levels, where “more high-powered equity incentives for CEOs do not seem to correlate with better management of risk.” These analyses have generally overlooked...


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