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Compensation and risk incentives in banking and finance

Author

Listed:
  • Jian Cai
  • Kent Cherny
  • Todd T. Milbourn

Abstract

We review why executive compensation contracts are often structured the way they are, analyze risk incentives stemming from various pay schemes, and examine the tendency of the banking and finance industry toward excessive risk-taking. Studying the typical executive pay structures in banking and finance before the financial crisis reveals some potentially problematic practices. These practices may have encouraged ?short-termism? and excessive risk-taking, which are two behaviors bank regulators aim to prevent with their recently issued guidance on incentive compensation.

Suggested Citation

  • Jian Cai & Kent Cherny & Todd T. Milbourn, 2010. "Compensation and risk incentives in banking and finance," Economic Commentary, Federal Reserve Bank of Cleveland, issue Sep.
    • Handle: RePEc:fip:fedcec:y:2010:i:sep14:n:2010-13
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    Citations

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    Cited by:

    1. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2012. "Bank regulation and stability: An examination of the Basel market risk framework," Discussion Papers 09/2012, Deutsche Bundesbank.
    2. Bottasso, Anna & Duchêne, Sébastien & Guerci, Eric & Hanaki, Nobuyuki & Noussair, Charles N., 2022. "Higher order risk attitudes of financial experts," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    3. Acharya, Viral & Litov, Lubomir P. & Sepe, Simone M., 2014. "Seeking Alpha, Taking Risk: Evidence from Non-executive Pay in U.S. Bank Holding Companies," Working Papers 13-18, University of Pennsylvania, Wharton School, Weiss Center.
    4. Tomasz Chmielewski & Tomasz Lyziak & Ewa Stanislawska, 2020. "Risk-Taking Channel and Its Non-Linearities: The Case of an Emerging Market Economy," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 70(1), pages 2-25, February.
    5. Boris Cournède & Oliver Denk & Peter Hoeller, 2015. "Finance and Inclusive Growth," OECD Economic Policy Papers 14, OECD Publishing.
    6. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2014. "Bank regulation and international financial stability: A case against the 2006 Basel framework for controlling tail risk in trading books," Journal of International Money and Finance, Elsevier, vol. 43(C), pages 107-130.

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