Incentive Pay and Bank Risk-Taking: Evidence from Austrian, German and Swiss Banks
Journal of International Economics, Vol. 96 (2015), S123-S140.
with Matthias Efing, Patrick Kampkötter and Johannes Steinbrecher


We use payroll data in the Austrian, German, and Swiss banking sector to identify incentive pay in the critical banking segments of treasury/capital market management and investment banking for 67 banks. We document an economically significant correlation of incentive pay with both the level and volatility of bank trading income — particularly for the pre-crisis period 2003–2007, in which incentive pay was strongest. This result is robust if we instrument the bonus share in the capital market divisions with the strength of incentive pay in unrelated bank divisions like retail banking. Moreover, pre-crisis incentive pay appears too strong for an optimal tradeoff between trading income and risk, which maximizes the net present value of trading income. Further analyses indicate that the bonus moderation during the crisis has removed excessive pre-crisis incentive pay.

Additional Files

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Media Coverage

The paper is discussed on the policy website under the title Bankers’ bonuses and performance sensitivity.

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 macht 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.

The magazine International Banker covers this research in its winter 2017 edition published on April 10, 2017 under the title What does a bank’s payroll reveal about its risk-taking?