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Exploring the effects of the ‘bonus cap’ rule : the impact of remuneration structure on risk-taking by bank managers

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Kokkinis, Andreas (2019) Exploring the effects of the ‘bonus cap’ rule : the impact of remuneration structure on risk-taking by bank managers. Journal of Corporate Law Studies, 19 (1). pp. 167-195. doi:10.1080/14735970.2018.1455492 ISSN 1757-8426.

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Official URL: https://doi.org/10.1080/14735970.2018.1455492

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Abstract

This article explores the effects of the bonus cap rule on UK banks’ remuneration practices with a view to evaluating its likely impact on the financial incentives faced by senior managers to make risky business decisions. The main argument is that the ratio of variable to fixed remuneration is only one of the factors that determine the intensity of financial incentives for UK bank managers to make risky decisions. More crucially, the steps taken by major UK banks to evade the effects of the cap by introducing fixed pay allowances, which are paid in shares but are legally structured as fixed remuneration, have created additional risk-taking incentives. Indeed, it is shown that paying part of executive remuneration in shares as such, rather than partly determining the amount of remuneration based on corporate financial performance, is a significant driver of risk-taking. It follows that there is no reason to believe that the bonus cap has achieved any improvement in bank senior managers incentives and, therefore, that EU law’s emphasis on the ratio of variable to fixed remuneration is misplaced.

Item Type: Journal Article
Subjects: H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > School of Law
Library of Congress Subject Headings (LCSH): Financial services industry, Banks and banking, Bonuses (Employee fringe benefits)
Journal or Publication Title: Journal of Corporate Law Studies
Publisher: Routledge
ISSN: 1757-8426
Official Date: 2019
Dates:
DateEvent
2019Published
23 April 2018Available
19 March 2018Accepted
Volume: 19
Number: 1
Page Range: pp. 167-195
DOI: 10.1080/14735970.2018.1455492
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access
Date of first compliant deposit: 21 March 2018
Date of first compliant Open Access: 23 October 2019
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