The Economics of Deferral and Clawback Requirements

Florian Hoffmann, Roman Inderst and Marcus Opp

No 16882, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Financial regulation; Moral hazard; Compensation design; Clawbacks; Bonus deferral; Short-termism (search for similar items in EconPapers)
JEL-codes: D86 G28 (search for similar items in EconPapers)
Date: 2022-01
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Related works:
Journal Article: The Economics of Deferral and Clawback Requirements (2022)
Working Paper: The economics of deferral and clawback requirements (2020)
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