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Title: Regulating Deferred Incentive Pay

Author(s): Florian Hoffmann, Roman Inderst and Marcus M. Opp

Publication Date: March 2014

Keyword(s): Compensation design, Financial regulation and Principal-agent models

Programme Area(s): Financial Economics

Abstract: Our paper examines the effect of recent regulatory proposals mandating the deferral of bonus payments and claw-back clauses for compensation contracts in the financial sector. We study a multi-task setting in which a bank employee, the agent, privately chooses (deal or customer) acquisition effort and diligence, which stochastically reduces the occurrence of negative events over time (such as loan defaults or customer cancellations). The key ingredient of the compensation contract is the endogenous timing of a long-term bonus that trades off the cost and benefit of delay resulting from agent impatience and the informational gain, respectively. Our main finding is that government interference with this privately optimal choice may

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Bibliographic Reference

Hoffmann, F, Inderst, R and Opp, M. 2014. 'Regulating Deferred Incentive Pay'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9877