The economics of deferral and clawback requirements

Marcus Opp, Florian Hoffmann and Roman Inderst

No 15081, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyze the effects of regulatory interference in compensation contracts, focusing on recent mandatory deferral and clawback requirements restricting (incentive) compensation of material risk-takers in the financial sector. Moderate deferral requirements have a robustly positive effect on equilibrium risk-management effort only if the bank manager's outside option is sufficiently high, else, their effectiveness depends on the dynamics of information arrival. Stringent deferral requirements unambiguously backfire. We characterize when regulators should not impose any deferral regulation at all, when it can achieve second-best welfare, when additional clawback requirements are of value, and highlight the interaction with capital regulation.

Keywords: Compensation regulation; Clawbacks; Bonus deferral; Short-termism; Moral hazard; Principal-agent models with externalities (search for similar items in EconPapers)
JEL-codes: D86 G21 G28 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-ban, nep-hrm and nep-mic
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Journal Article: The Economics of Deferral and Clawback Requirements (2022)
Working Paper: The Economics of Deferral and Clawback Requirements (2022)
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