Compensation

Sergio Scandizzo

We saw in Chapter 11 that compensation in banking suffers from two interrelated problems: it encourages excessive risk-taking when it is tied to financial performance, and when such performance is corrected for risk, due to the cyclical nature of the measures used, it discourages risk-taking far too much in times of crisis. We also noted that, in line with both practitioners and regulators, the stated objective of executive compensation is the reward of sustainable, long-term performance as such an outcome is presumably not only good for banks themselves, but also for the stability of financial markets and ultimately for society as a whole. This suggests that, like performance, compensation should also ideally be stable and sustainable, a concept that may not sit naturally with bankers’ expectations, especially in certain business lines where the ultimate goal is exceptional performance through hopefully not completely reckless risk-taking. In other words, a compensation system that discourages excessive risk-taking is inevitably one whose elasticity to both performance and risk is lower.

Since we cannot reliably anticipate the consequences of the risks taken, let alone foresee