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Ferrarini, Guido --- "Bankers’ Compensation and Prudential Supervision: The International Principles" [2012] ELECD 604; in Thomas, S. Randall; Hill, G. Jennifer (eds), "Research Handbook on Executive Pay" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on Executive Pay

Editor(s): Thomas, S. Randall; Hill, G. Jennifer

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849803960

Section: Chapter 6

Section Title: Bankers’ Compensation and Prudential Supervision: The International Principles

Author(s): Ferrarini, Guido

Number of pages: 13

Extract:

6 Bankers' compensation and prudential
supervision: the international principles
Guido Ferrarini


1 INTRODUCTION

In the quest for possible causes of the recent financial crisis, commentators often argue
that bank executives had poor incentives.1 Critics claim, in particular, that executive
compensation was not properly aligned with long-term performance (Bebchuk and Fried
2010; Posner 2009), while regulators seek ways to change practices in order to restore this
alignment. At least two questions arise with respect to incentives practices. The first is
whether executive compensation at banks before the crisis was predominantly short-term
oriented. Academics and politicians answer this question differently. The latter argue,
with the support of the media, that widespread short-term incentives to bank managers
were at the root of the recent crisis. On the academic side of the current debate, recent
empirical studies reveal no proof that short-term incentives led to excessive risks. In
particular, an empirical study examined in section 2 of this chapter shows that, in the
United States at least, pay was generally aligned with the long-term interest of sharehold-
ers (Fahlenbrach and Stulz 2010). Similar studies are not available for Europe because
data needed to calculate the value of stock options and long-term incentives is generally
not publicly available.2 The second question, which is further analyzed in section 2, is
whether banking regulation should cover compensation arrangements, either by man-
dating pay structures or by requiring their adjustment in order to avoid excessive risk
taking. I submit that ...