Working Paper: CEPR ID: DP15081
Authors: Florian Hoffmann; Roman Inderst; Marcus Opp
Abstract: We analyze the effects of regulatory interference in compensation contracts, focusing on recent mandatory deferral and clawback requirements restricting (incentive) compensation of material risk-takers in the financial sector. Moderate deferral requirements have a robustly positive effect on equilibrium risk-management effort only if the bank manager's outside option is sufficiently high, else, their effectiveness depends on the dynamics of information arrival. Stringent deferral requirements unambiguously backfire. We characterize when regulators should not impose any deferral regulation at all, when it can achieve second-best welfare, when additional clawback requirements are of value, and highlight the interaction with capital regulation.
Keywords: compensation; regulation; clawbacks; bonus deferral; short-termism; moral hazard; principal-agent models with externalities
JEL Codes: D86; G28; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| moderate deferral requirements (I19) | risk management effort (H12) |
| manager's outside option (M55) | risk management effort (H12) |
| stringent deferral requirements (H60) | risk management effort (H12) |
| clawback requirements (G34) | risk management effort (H12) |
| manager's outside option (M55) | effectiveness of deferral requirements (I24) |
| dynamics of information arrival (C69) | effectiveness of deferral requirements (I24) |