Incentive pay and bank risk-taking: Evidence from Austrian, German, and Swiss banks

Matthias Efing, Harald Hau, Patrick Kampkötter and Johannes Steinbrecher

Journal of International Economics, 2015, vol. 96, issue S1, S123-S140

Abstract: We use payroll data in the Austrian, German, and Swiss banking sector to identify incentive pay in the critical banking segments of treasury/capital market management and investment banking for 67 banks. We document an economically significant correlation of incentive pay with both the level and volatility of bank trading income—particularly for the pre-crisis period 2003–2007, in which incentive pay was strongest. This result is robust if we instrument the bonus share in the capital market divisions with the strength of incentive pay in unrelated bank divisions like retail banking. Moreover, pre-crisis incentive pay appears too strong for an optimal trade-off between trading income and risk, which maximizes the net present value of trading income. Further analyses indicate that the bonus moderation during the crisis has removed excessive pre-crisis incentive pay.

Keywords: Trading income; Bank risk; Incentive pay; Bonus payments (search for similar items in EconPapers)
JEL-codes: D22 G20 G21 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Related works:
Chapter: Incentive Pay and Bank Risk-taking: Evidence from Austrian, German, and Swiss Banks (2014)
Working Paper: Incentive Pay and Bank Risk-Taking: Evidence from Austrian, German, and Swiss Banks (2014)
Working Paper: Incentive Pay and Bank Risk-Taking: Evidence from Austrian, German, and Swiss Banks (2014)
Working Paper: Incentive Pay and Bank Risk-Taking:Evidence from Austrian, German, and Swiss Banks (2014)
Working Paper: Incentive Pay and Bank Risk-Taking: Evidence from Austrian, German, and Swiss Banks (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:96:y:2015:i:s1:p:s123-s140

DOI: 10.1016/j.jinteco.2014.12.006

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