Convex payoffs: implications for risk-taking and financial reform

Stephen LeRoy

FRBSF Economic Letter, 2010, issue oct4

Abstract: Financial executive pay is a convex function of profits if recipients get a greater increment in pay when returns are high as opposed to moderate, compared with when returns are moderate as opposed to low. Convex compensation packages give financial executives incentive to adopt risky investment projects, implement highly levered capital structures, and create new risk. Financial regulators may be able to enforce changes in compensation that would attenuate these adverse effects.

Keywords: Executives; -; Salaries (search for similar items in EconPapers)
Date: 2010
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