Executive rewards put banks at greater risk

May 19, 2011

(PhysOrg.com) -- New University of Ediburgh research has linked the risks taken by banks with the compensation received by their executives.

According to the research, which analysed US bank acquisitions from 1993-2007, are more likely to engage in risky takeovers when their executives are personally compensated for doing so.

Consequently, the amount of risk taken on by banks - a major factor in the ongoing - is a direct result of the amount of incentives given to banking executives, according to the School’s Jens Hagendorff.

As the link between executive pay and bank encourages financial volatility, regulators should consider limiting the incentives, such as stock options, that bankers receive, he says.

Jens Hagendorff, Senior Lecturer, University of Edinburgh Business School, said: "Chief executive pay in banking is much more geared towards rewarding risk-taking than in any other industry. Our research shows that banking chief executives are clearly responsive to the risk-taking incentives they receive."

The research - carried out by researchers at the University of Edinburgh Business School and the University of Leeds - found that during 1993-2007, chief executives were offered increasingly large amounts of risk-based compensation.

It also found that banks whose chief executives received higher incentives engaged in riskier behavior than they had previously.

Explore further: Marcellus drilling boom may have led to too many hotel rooms

More information: The paper is published in the Journal of Corporate Finance. It is available here: dx.doi.org/10.1016/j.jcorpfin.2011.04.009

Provided by University of Ediburgh

5 /5 (1 vote)
add to favorites email to friend print save as pdf

Related Stories

Mortgage crisis: Blame the bank?

Aug 27, 2008

(PhysOrg.com) -- Banks have played a big role in the mortgage crisis, not only because they issued loans to suspect borrowers, but because many originated and sold bad loans to other lenders, says a University of Michigan ...

Google rewards top executives

Mar 12, 2011

Google has awarded nearly $9 million in bonuses and another $50 million in equity to four top executives of the Internet giant, according to a filing with the US Securities and Exchange Commission.

Underwater stock options drive top executives turnover

Nov 20, 2008

When the market price of company stock falls below the exercise price, the options are considered to be "out of the money" or underwater. Many publicly traded firms have become concerned about retaining highly valued executives ...

Recommended for you

Marcellus drilling boom may have led to too many hotel rooms

Sep 18, 2014

Drilling in Pennsylvania's Marcellus Shale region led to a rapid increase in both the number of hotels and hotel industry jobs, but Penn State researchers report that the faltering occupancy rate may signal that there are ...

Entrepreneurs aren't overconfident gamblers

Sep 17, 2014

Leaving one's job to become an entrepreneur is inarguably risky. But it may not be the fear of risk that makes entrepreneurs more determined to succeed. A new study finds entrepreneurs are also concerned about what they might ...

User comments : 1

Adjust slider to filter visible comments by rank

Display comments: newest first

daniel_ikslawok
not rated yet May 20, 2011
No, they should give them as many incentives as they want. The only condition, however, should be a long-term success, so that they only get paid ten per cent of their bonuses for a period of five years, and when the company is still doing good the rest. Change their mindsets!!