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.
Keywords: G13; G21; call spread; default probability; executive stock option programmes; regulation
Document Type: Research Article
Affiliations: Netspar and Faculty of Mathematics and Economics, University of Ulm, 89069, Ulm, Germany
Publication date: 02 September 2014
- Editorial Board
- Information for Authors
- Subscribe to this Title
- Ingenta Connect is not responsible for the content or availability of external websites
- Access Key
- Free content
- Partial Free content
- New content
- Open access content
- Partial Open access content
- Subscribed content
- Partial Subscribed content
- Free trial content