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Paying for Risk
Report

Paying for Risk

Bankers, Compensation, and Competition

Simone M. Sepe and Charles K. Whitehead
Center for Financial Studies, 2014
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Editorial Rating

7

Qualities

  • Innovative
  • Overview
  • Background

Recommendation

In the rush to crack down on banks’ risk taking after the 2007–2009 financial crisis, politicians and regulators focused on precisely the wrong issue: They restricted pay for bank executives while ignoring the reality that lower-level staff, rather than executives, actually take on the risk. According to legal experts Simone M. Sepe and Charles K. Whitehead, in a competitive market for talent, those employees can sell their services to rival institutions, moving on before their risky bets collapse. getAbstract recommends their report on bank compensation to policy makers, finance leaders and human resources professionals looking to link risk and pay.

Take-Aways

  • Limiting bank-executive compensation doesn’t address the problem of excessive risk in bank portfolios.
  • Due to competition for talent in financial services, nonexecutives who take and profit from risky bets in the short run can move to other firms without suffering the consequences of their failed transactions.
  • Regulators could “impose a compensation cap” that would consider both the short- and long-term ramifications of employees’ deals on banks’ financial performance.

About the Authors

Simone M. Sepe is an associate professor of law at the University of Arizona. Charles K. Whitehead is a law professor at Cornell Law School. This report will appear in Volume 100 of Cornell Law Review.

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