Europe's Banker Bonus Limits Probably Won't Actually Limit Banker Pay


The University of Chicago's Luigi Zingales has a smart post on what we know about how banker pay affects risky behavior—not all that much—and the futility of new European restrictions on banker bonuses. As Zingales points out, there's no clear causal effect between higher banker pay and greater risk taking. Despite this, however, the European parliament recently set up a number of rules regarding how bankers bonuses can be structured each year, including a strict limit to how much of each year's bonus can be paid in cash. But as Zingales says, this restriction isn't likely to be all that effective:

The main shortcoming is that these restrictions can be circumvented easily, since they apply only to bonuses, whereas banks maintain discretion over the mix between salary and bonus. Currently, bank managers receive their bonuses at the beginning of each year, with the level based on their individual performance during the previous year. It would be very easy to transform last year's bonus, based on last year's performance, into this year's salary. The salary, which can be paid entirely in cash, will be renegotiated every year, thereby skirting all the regulatory restrictions.

The end result—that bankers simply end up having to jump through a series of regulatory hoops in order to get the same result—is government regulation that's both unnecessary and ineffective.