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Bank Bonus Pay as a Risk Sharing Contract

Author

Listed:
  • Matthias Efing

    (HEC Paris - Finance Department; CESifo (Center for Economic Studies and Ifo Institute for Economic Research))

  • Harald Hau

    (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute))

  • Patrick Kampkötter

    (University of Tuebingen - Department of Managerial Accounting)

  • Jean-Charles Rochet

    (GFRI, University of Geneva; Swiss Finance Institute; University of Zurich - Swiss Banking Institute (ISB))

Abstract

We argue that risk sharing motivates the bank-wide structure of bonus pay. In the presence of fi nancial frictions that make external fi nancing costly, the optimal contract between shareholders and employees involves some degree of risk sharing whereby bonus pay partially absorbs earnings shocks. Using payroll data for 1:26 million 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 with incentive theories of bonus pay-but support an important risk sharing motive. In particular, bonuses respond to performance shocks that are outside the control of employees because they originate in other bank divisions or even outside the bank.

Suggested Citation

  • Matthias Efing & Harald Hau & Patrick Kampkötter & Jean-Charles Rochet, 2018. "Bank Bonus Pay as a Risk Sharing Contract," Swiss Finance Institute Research Paper Series 18-72, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1872
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    1. Edward D. Van Wesep & Brian Waters, 2022. "Bonus Season: A Theory of Periodic Labor Markets and Coordinated Bonuses," Management Science, INFORMS, vol. 68(7), pages 5464-5492, July.
    2. Ata Can Bertay & Jose Gabo Carreno & Harry Huizinga & Burak Uras & Nathanael Vellekoop, 2022. "Technological Change and the Finance Wage Premium," Working Papers tecipa-738, University of Toronto, Department of Economics.
    3. Michael Haylock, 2022. "Distributional differences in the time horizon of executive compensation," Empirical Economics, Springer, vol. 62(1), pages 157-186, January.
    4. Wagner, Konstantin, 2020. "Competition, cost structure, and labour leverage: Evidence from the U.S. airline industry," IWH Discussion Papers 21/2020, Halle Institute for Economic Research (IWH).

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    More about this item

    Keywords

    banker compensation; risk sharing; bonus pay; operating leverage;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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