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Effectiveness and (in)efficiencies of compensation regulation: Evidence from the EU banker bonus cap

Stefano Colonnello, Michael Koetter and Konstantin Wagner

No 7/2018, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: We investigate the (unintended) effects of bank executive compensation regulation. Capping the share of variable compensation did not induce an executive director exodus from EU banking because banks raised fixed compensation sufficiently to retain executives. However, risk-adjusted bank performance deteriorated, consistent with reduced incentives to exert effort and insurance effects associated with fixed compensation components. We also find that banks with directors that are more affected by the bonus cap exhibit more systemic as well as systematic risk. This result casts doubts on the effectiveness of the policy to achieve its aim to enhance financial stability.

Keywords: banks; bonus cap; executive compensation; executive turnover (search for similar items in EconPapers)
JEL-codes: G21 G32 G34 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-ban and nep-hrm
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