A New Look at Regulating Bankers’ Remuneration

Research Questions/Issues: Executive remuneration as a tool of resolving agency problems or as a sign of them has been discussed in the literature for decades. The discussion, however, has been focused on non-financial firms. Bankers’ remuneration has been overlooked until recently. Due to specific features of the banking industry, and in particular, its potentially strong conflict between shareholders and stakeholders (type III agency conflict), it is not clear its shareholders who should be having dominant voice in fixing format and size of bankers’ remuneration. As risk-taking metrics are being set by regulators, and remuneration incentives may have strong risk-taking implications, the question arises whether remuneration of bankers should be set by boards like it is done in non-financial firms, whether it should be set by regulators. There are strong arguments in support of the latter solution, yet, the current regulatory developments do not provide a uniform support for leaving remuneration in hands of regulators. <br><br>Research Findings/Insights: The paper argues that due to numerous externalities it is necessary to regulate bankers’ remuneration. It also argues that this regulation should not focus on strengthening shareholders’ rights as the alignment of bankers’ incentives with those of shareholders’ leads to excessive risk-taking. It also argues that focus on executive remuneration is incorrect given that material risk takes are among lower rank bank employees. It discusses the necessity of remuneration regulation but also provides a critical assessment of the regulatory developments. . <br><br>Theoretical/Academic Implications: The presented analysis questions suitability of the common idea of assessing corporate governance in banks in the same way as it is done for non-financial institutions. It identifies important questions and avenues for future research. It calls for more theoretical and empirical work to understand the complexity and implications of adopting particular remuneration structures for companies that are highly levered, highly interconnected and ‘too big to fail’. <br><br>Practitioner/Policy Implications: The paper has important implication for the current and future policy makers and regulators. It highlights the current areas of regulatory focus to allow for cross-country comparison but also provides important discussion on weak points of the current regulation and future development trends.