Regulation of remuneration policy in the financial sector

Purpose – The recent financial crisis has shown that in substantial parts of the banking industry, bonus payments have a short-term focus and are not risk-adjusted. These remuneration structures persist as the banking industry is constrained by pressures on the labour market. The unilateral introduction of a longer-term focus in variable remuneration could put a bank at a first-mover disadvantage. The paper aims to discuss these issues. Design/methodology/approach – The paper derives from a literature overview and empirical evidence possible reform measurements toward a longer-term focus in variable remuneration. The paper also discusses the recent reforms in European law regarding remuneration policy. Findings – The paper argues that an efficient regulation of remuneration policy should be directed at ensuring that remuneration policies and practices are aligned with effective risk management. The financial authorities should therefore closely observe market developments in this perspective and take countermeasures if necessary. Originality/value – This seminar work gives some interesting insights about opportunistic behaviour and a CEO's short-term incentives from an economic point of view. It provides lawmakers, regulators and firms with a comprehensive comparison of recent remuneration reforms in Europe.