Bank Bonus Pay as a Risk Sharing Contract

Matthias Efing, Harald Hau, Patrick Kampkötter and Jean Rochet

No 1285, HEC Research Papers Series from HEC Paris

Abstract: We show that banker bonuses cannot be understood exclusively as incentive contracts, but also incorporate a significant risk sharing dimension between bank shareholders and bank employees. This contrasts with the conventional view whereby diversified shareholders fully insure risk averse employees. However, financial frictions imply that shareholder value is concave in a bank's cash reserves---making shareholders effectively risk averse. The optimal contract between shareholders and employees then involves some degree of risk sharing. Using extensive payroll data on 1.26 million bank employee years in the Austrian, German, and Swiss banking sectors, we show that the structure of bonus pay within and across banks is compatible with an economically significant risk sharing motive, but difficult to rationalize based on incentive theories of bonus pay only.

Keywords: Bank compensation; risk sharing; bank risk; operating leverage (search for similar items in EconPapers)
JEL-codes: D22 G20 G21 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2018-06-26
New Economics Papers: this item is included in nep-ban, nep-cta, nep-eur and nep-hrm
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Bank Bonus Pay as a Risk Sharing Contract (2023)
Working Paper: Bank Bonus Pay as a Risk Sharing Contract (2023)
Working Paper: Bank Bonus Pay as a Risk Sharing Contract (2019)
Working Paper: Bank Bonus Pay as a Risk Sharing Contract (2018)
Working Paper: Bank Bonus Pay as a Risk Sharing Contract (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1285

DOI: 10.2139/ssrn.3202916

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