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Federal Reserve Bank of Cleveland
Economic Commentary
Compensation and risk incentives in banking and finance
Jian Cai
Kent Cherny
Todd 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.


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Jian Cai & Kent Cherny & Todd Milbourn, "Compensation and risk incentives in banking and finance" , Federal Reserve Bank of Cleveland, Economic Commentary, issue Sep, 2010.
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Keywords: Executives - Salaries; Financial risk management
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