Summary of Paying for Risk

Bankers, Compensation, and Competition

Center for Financial Studies,

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Paying for Risk summary
Restricting bank executives’ pay is misguided. Instead, focus on the competition for banks’ risk takers.

Rating

7 Overall

7 Importance

8 Innovation

7 Style

Recommendation

In the rush to crack down on banks’ risk taking after the 2007–2009 financial crisis, politicians and regulators focused on precisely the wrong issue: They restricted pay for bank executives while ignoring the reality that lower-level staff, rather than executives, actually take on the risk. According to legal experts Simone M. Sepe and Charles K. Whitehead, in a competitive market for talent, those employees can sell their services to rival institutions, moving on before their risky bets collapse. getAbstract recommends their report on bank compensation to policy makers, finance leaders and human resources professionals looking to link risk and pay.

In this summary, you will learn

  • Why limits on bank executive pay won’t reduce risk
  • What three changes would make pay more rational and risk-taking more reasonable
 

Summary

After the 2007–2009 financial crisis, authorities misguidedly focused on limiting pay for bank executives, though nonexecutives are the real risk takers. Consider Bruno Iksil, JPMorgan’s trader who earned $6.76 million in 2011 but lost the bank $6.2 billion in 2012, and Goldman Sachs’s Fabrice Tourre...
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About the Authors

Simone M. Sepe is an associate professor of law at the University of Arizona. Charles K. Whitehead is a law professor at Cornell Law School. This report will appear in Volume 100 of Cornell Law Review.


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