Regulating Remuneration Schemes in Banking

Isabel Argimón, Gerard Arqué and Francesc Rodríguez

This article was first published as a chapter in Basel III and Beyond, by Risk Books

In the wake of the current financial crisis, compensation schemes in financial firms have received heightened attention. The reason is that executive compensation packages have been regarded as one of the key drivers in the generation of the crisis, although a causal link has not been established. The discussion has not been limited to the role played by executive pay arrangements but it also covered remuneration practices applied to a broader group of employees, and especially to personnel undertaking activities that are regarded as involving risk taking. This chapter reviews the proposals that have been designed to reform remuneration practices in financial services.

Shareholders, regulators, and academics have been re-examining the decision-making process in financial firms and have proposed changes to reduce the risks inherent in the inadequate incentives of firms. This refers particularly to those related to compensation policies and structures¹¹ See, for example, UBS (2008) and IIF (2008) for the initial industry reaction, the contributions of Delong, Portes and Zimmermann in