Journal Article

Compensation and risk incentives in banking and finance

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.

Keywords: Executives - Salaries; Financial risk management;

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Economic Commentary

Publication Date: 2010

Issue: Sep

Order Number: 13