Skip to main content
Unpublished Paper
Pay for Regulator Performance
ExpressO (2011)
  • Todd Henderson, University of Chicago
  • Frederick Tung, Boston University
Abstract

Few doubt that executive compensation arrangements encouraged the excessive risk taking by banks that led to the recent Financial Crisis. Accordingly, academics and lawmakers have called for the reform of banker pay practices. In this Article, we argue that regulator pay is to blame as well, and that fixing it may be easier and more effective than reforming banker pay. Regulatory failures during the Financial Crisis resulted at least in part from a lack of sufficient incentives for examiners to act aggressively to prevent excessive risk. Bank regulators are rarely paid for performance, and in atypical cases involving performance bonus programs, the bonuses have been allocated in highly inefficient ways. We propose that regulators, specifically bank examiners, be compensated with a debt-heavy mix of phantom bank equity and debt, as well as a separate bonus linked to the timing of the decision to shut down a bank. Our pay-for-performance approach for regulators would help reduce the incidence of future regulatory failures.

Disciplines
Publication Date
September 8, 2011
Citation Information
Todd Henderson and Frederick Tung. "Pay for Regulator Performance" ExpressO (2011)
Available at: http://works.bepress.com/todd_henderson/14/