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The impact of Incentives and risk-taking: Evidence from the UK banking sector

The impact of Incentives and risk-taking: Evidence from the UK banking sector

Brickman, Karen ORCID: 0000-0002-0818-7485, Otley, David and Warren, Elizabeth ORCID: 0000-0002-1441-9369 (2016) The impact of Incentives and risk-taking: Evidence from the UK banking sector. In: 39th Annual Congress of the European Accounting Association in The Netherlands, 11-13 May 2016, Maastricht. (Unpublished)

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Abstract

It has been argued that poor remuneration policies at financial institutions were a major contributor to the 2008 financial crisis. Consequently, global regulators have developed several remuneration codes of conduct for designing incentive schemes whereby the behaviour of employees under those schemes are more aligned with the relationship between risk and return. The primary aim of these remuneration codes is to mitigate employees’ propensity for excessive risk-taking. In view of these changes, the purpose of this paper is to examine the impact of the three most prominent changes brought about by these codes: a bonus cap; deferral of bonus payments; and a clawback clause on bonuses, on traders’ risk-taking behaviour. We present a qualitative analysis of semi-structured interviews with bankers from ten large investment banks. The findings indicate that bonus deferrals have no impact on risk-taking behaviour, with the impact of a bonus cap and bonus clawback being contingent upon the circumstances in which they are implemented. We conclude that uncapped pay-per-performance incentive schemes encourage risk-taking, and that the vital ingredient in reducing traders’ propensity for excessive risk-taking is the commitment of senior management to a strong risk culture, not the remuneration codes.

Item Type: Conference or Conference Paper (Paper)
Uncontrolled Keywords: Risk-taking, Performance Management, Bonus
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
H Social Sciences > HG Finance
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of Accounting & Finance
Related URLs:
Last Modified: 09 Jun 2020 19:52
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
Selected for GREAT 2019: None
Selected for REF2021: None
URI: http://gala.gre.ac.uk/id/eprint/28462

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