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The Economics of Deferral and Clawback Requirements

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  • Hoffmann, Florian
  • Inderst, Roman
  • Opp, Marcus

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.

Suggested Citation

  • Hoffmann, Florian & Inderst, Roman & Opp, Marcus, 2022. "The Economics of Deferral and Clawback Requirements," CEPR Discussion Papers 16882, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16882
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    More about this item

    Keywords

    Financial regulation; Moral hazard; Compensation design; Clawbacks; Bonus deferral; Short-termism;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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