Bank Bonus Pay as a Risk Sharing Contract
Review of Financial Studies, 2023, Vol. 36(1), 235-280
SFI Working Paper No. 18-72, HEC Paris Research Paper No. FIN-2018-1285
with Matthias Efing, Patrick Kampkötter and Jean-Charles Rochet
We argue that risk sharing motivates the bank-wide structure of bonus pay. In the presence of financial frictions that make external financing 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 exclusively with incentive theories of bonus pay—but support an important risk sharing motive.
The data in this paper is confidential and, unfortunately, cannot be shared.
The paper is discussed on the policy website voxeu.org under the title Bankers’ bonuses and performance sensitivity.
A summary of the paper was also published in The European Financial Review under the title Bank Governance and the Crisis.
A detail summary of the article in German was published by the ifo Schnelldienst 3/2015 on February 12, 2015 under the title Die Dosis mach das Gift – eine Analyse zum Einfluss von Bonuszahlungen auf die Profitabilität und das Risiko von Banken.
A second discussion of the paper appeared in the German practitioner journal Die Bank, Heft 03/2015, pp. 66-69, under the title Optimale Vergütungsstrukturen in Banken.
