Pay for Banker Performance: Structuring Executive Compensation for Risk Regulation

INTRODUCTION 1206 I. THE BANK CONFIDENCE GAME 1210 A. Bank Runs 1210 B. Deposit Insurance and Banker Moral Hazard 1211 C. Bank Risk Regulation 1214 II. PAY FOR PERFORMANCE AND THE FINANCIAL CRISIS 1216 A. Pay for Performance for Shareholders 1216 B. The Evolution of Incentive Pay for Bankers 1218 C. Banker Pay Preceding the Crisis 1222 D. Post-Crisis Pay Constraints 1224 III. PAYING FOR LESS RISKY PERFORMANCE 1226 A. Inside Debt Compensation 1227 B. Market Discipline through Public Subordinated Debt 1229 C. Features 1232 D. Bank-Level Debt to Counter Corporate Structure Effects 1234 IV. COMPARING OTHER APPROACHES 1241 A. Bhagat and Romano: Long-Term Restricted Stock 1241 B. Bebchuk and Spamann: Paying by the Slice 1244 C. Comparing 1245 V. IMPLEMENTATION 1247 A. Setting Debt–Equity Targets 1248 B. Implementation Incentives 1249 CONCLUSION 1251