Bankers' Pay Structure and Risk

John Thanassoulis (University of Oxford -Visiting TSE)

February 21, 2011, 12:30–14:00


Room MF 323

Internal Finance Workshop


This paper studies the contracting problem between banks and their bankers, embedded in a competitive labour market for banker talent. Banks must motivate effort whilst not creating incentives to inflate early earnings through risk-shifting. I show that as competition between banks for bankers rises, it becomes more expensive for the bank to manage the risk-shifting problem than the moral hazard problem. If competition grows strong enough, then contracts which permit some risk-shifting become optimal. The market will be unable to determine the true level of risk in this case. The paper uses US data to demonstrate that balance sheet and deferred compensation behaviour have changed in a manner which triggers the studied mechanism. Calibration demonstrates that forced deferral of as much as 60% of bonus pay can be justified to prevent risk-shifting.


John Thanassoulis (University of Oxford -Visiting TSE), Bankers' Pay Structure and Risk, Internal Finance Workshop, Toulouse: TSE, February 21, 2011, 12:30–14:00, room MF 323.