Incentive-compatible compensation and regulation
This article uses contingent claims analysis and regulatory constraints to show how a bank can create incentive-compatible compensation for the senior management aligned with the interests of the other stakeholders. For this purpose, the remuneration package takes the form of a 'call spread' on the bank's equity. Unlike regular stock option programmes, a call spread limits the upside potential for the senior management. This prevents unlimited risk taking. Additionally, a maximum regulatory default probability also constrains risk-taking behaviour. We show under which parameterizations the remuneration package and the regulatory constraint offer equal incentives for the senior management.
Year of publication: |
2014
|
---|---|
Authors: | Chen, An |
Published in: |
Applied Economics. - Taylor & Francis Journals, ISSN 0003-6846. - Vol. 46.2014, 25, p. 3074-3081
|
Publisher: |
Taylor & Francis Journals |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Endowment Assurance Products: Effectiveness of Risk-Minimizing Strategies under Model Risk
Chen, An, (2008)
-
Optimal retirement planning under partial information
Bäuerle, Nicole, (2019)
-
Loss Analysis of a Life Insurance Company Applying Discrete-time Risk-minimizing Hedging Strategies
Chen, An, (2005)
- More ...