Do bankers make too much? That question has been widely discussed ever since the 2008 financial crash, which many experts blamed (in part) on a system of compensation that excessively rewarded risky behavior.
As one element of the bailout, President Obama limited the compensation of executives at banks the government rescued, but the cap wasn’t absolute—compensation above $500,000 could be paid in stock—and the measure lifted once a bank paid the government back. The idea was that if bankers can’t make crazy sums of money by taking crazy risks, there will cease to be a reason to take those risks.
So does that strategy work?
In a new working paper, Anya Kleymenova and Irem Tuna, who are professors of accounting at the University of Chicago Booth School of Business and London Business School respectively, look at one place that tried it—England, where an earnings-capping law went into effect in 2010. The law, called the Remuneration Code, specifically targets the bonuses of those making more than £500,000 a year, mandating that 60 percent of each bonus be paid out a minimum of three years after the fact.
The paper found that, indeed, it worked. Under the code, bankers became “less risky and [exhibited] higher pay-performance sensitivity, in line with the intended purpose of the regulation.”