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Bank Bonus Pay as a Risk Sharing Contract

Author

Listed:
  • Matthias Efing
  • Harald Hau
  • Patrick Kampkötter
  • Jean-Charles Rochet
  • Itay Goldstein

Abstract

We argue that risk sharing motivates the bankwide structure of bonus pay. In the presence of financial frictions that make external financing costly, the optimal contract between shareholders and employees involves some degree of risk sharing whereby bonus pay partially absorbs negative earnings shocks. Using payroll data formillion employee-years in all functional divisions of Austrian, German, and Swiss banks, we uncover several empirical patterns in bonus pay that are difficult to rationalize exclusively with incentive theories of bonus pay but that support an important risk sharing motive.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Matthias Efing & Harald Hau & Patrick Kampkötter & Jean-Charles Rochet & Itay Goldstein, 2023. "Bank Bonus Pay as a Risk Sharing Contract," The Review of Financial Studies, Society for Financial Studies, vol. 36(1), pages 235-280.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:1:p:235-280.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac030
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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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