Bankers' remuneration reforms and new challenges

• Published date: 01 January 2023
• Author: Anna (Ania) Zalewska
• Date: 01 January 2023
• DOI: http://doi.org/10.1111/corg.12454

REVIEW ARTICLE

Bankers' remuneration reforms and new challenges

Anna (Ania) Zalewska

Centre for Governance, Regulation and

Industrial Strategy (CGR&IS), School of

Management, University of Bath, Bath, UK

Correspondence

Anna (Ania) Zalewska, Centre for Governance,

Regulation and Industrial Strategy (CGR&IS),

School of Management, University of Bath,

Bath, UK.

Email: a.zalewska@bath.ac.uk

Funding information

European Cooperation in Science and

Technology, Grant/Award Number: 19130;

Fundaç˜ao para a Ciência e a Tecnologia, Grant/

Award Number: PTDC/IIM-FIN/7188/2014

Abstract

Research Question/Issue: The desire to structure bankers' remuneration in a way

that it is risk sensitive and aligned with the long-term incentives of their institutions

was at the center of the post Global Financial Crisis (GFC) regulatory reforms. A

decade later, it is unclear whether the reforms achieved what they were intended for

and whether they have resulted in some unintended consequences. The issue of

unintended consequences is particularly important given that the banking sector

needs to embrace technological innovation (Fintech) and the sustainable banking

agenda.

Research Findings/Insights: We are still far from understanding the real costs and

benefits of the remuneration reforms because it is difficult to isolate the impact of

remuneration restrictions from the impact other regulations and policies had on

restricting risk taking, banking structures and bonus culture. However, even if it is

questionable whether the remuneration reforms contributed significantly towards

improving the stability of the banking sector, they seem unsuitable for promoting

Fintech and the sustainable banking agenda.

Theoretical/Academic Implications: The post-GFC remuneration reforms may not

sufficiently align bankers with stakeholders' interests which is essential to promote

adoption of Fintech and sustainable banking agenda.

Practitioner/Policy Implications: The lack of in-depth understanding of the effects

of the remuneration reforms creates a barrier to understand the impact of

the reforms on how banks innovate to adopt Fintech and the sustainable

banking agenda. If the existing remuneration regulation limits the openness to

innovation and strategic change, then the regulation needs to be revisited and

modified.

KEYWORDS

corporate governance, banking, bonuses, clawback, climate change, Fintech, malus, regulation,

remuneration, risk taking, sustainability

Received: 15 April 2021 Revised: 7 April 2022 Accepted: 12 April 2022

DOI: 10.1111/corg.12454

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.

© 2022 The Author. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

Corp Govern Int Rev. 2023;31:161–177. wileyonlinelibrary.com/journal/corg 161

1|INTRODUCTION

In the wake of the 2008 Global Financial Crisis (GFC), the remunera-

tion of top executives of banks and other systemically important

financial institutions came under scrutiny as one of the main causes of

excessive risk taking which led to the GFC. Numerous regulatory poli-

cies imposing restrictions on how bankers are to be paid followed.

While some countries addressed the reform of bankers' remuneration

through setting principles (e.g., the United States), others (e.g., the EU)

responded with prescriptive rules and tight regulatory requirements.

Although few would argue that remuneration does not impact risk

taking and shape the organizational culture, the question remains

whether the remuneration reforms that followed the GFC are achiev-

ing what their designers intended and, alongside this, whether they

are fit for purpose given the ongoing change in the structure and

functioning of the financial sector induced by the fast-developing

financial technology, the challenges set by climate change, and the

need to adopt the sustainability agenda. The aim of this paper is to

discuss the evidence (provided both by the academic literature and

regulatory bodies) to shed light on the possible answers.

Excessive risk taking was a primary cause of the GFC, and not

surprisingly, regulatory intervention has been focused on restricting

such behavior in the future. It is commonly believed that remunera-

tion levels and structures contributed to the GFC

1

; hence, it is not

entirely surprising that regulators have targeted remuneration prac-

tices and that the variable component has attracted particular atten-

tion. Numerous studies have shown that there is a positive

relationship between risk taking and executive variable compensation

(e.g., Adams, 2012; Balachandran et al., 2011; Boyallian & Ruiz-

Verdú, 2018; DeYoung et al., 2013; Gande & Kalpathy, 2017;

Kolasinski & Yang, 2018; Kolm et al., 2017; Sun, 2018), while others

have shown a similar relationship for non-executive bank employees

(Acharya et al., 2013; Agarwal & Ben-David, 2018; Cole et al., 2015;

Efing et al., 2015). More recently, the literature has also started to dis-

cuss the nature of regulatory changes (e.g., de Andrés et al., 2019;

Salter, 2019; Zalewska, 2016) and the impact of individual regulations

on the performance, governance, and risk taking of banks (e.g., Suss

et al., 2020; Thanassoulis & Tanaka, 2018; von Ehrlich &

Radulescu, 2017). However, given that these papers focus on specific

regulatory issues, we are still a long way short of providing a holistic

picture of the impact of the remuneration reforms and how they have

contributed to the stability of the banking industry, especially in the

light of the growing adoption of financial innovation (Fintech), the

challenges induced by climate change, and the adoption of the sus-

tainability agenda.

The rapid development of Fintech, married with insufficient regu-

lation of Fintech products and services and, indeed, of this whole new

branch of the financial industry, has created a pressing need to

expand our knowledge of the factors stimulating, and consequences

of, the adoption of Fintech. On the one hand, current regulation is not

well designed to mitigate the risks that may emerge from the adoption

of Fintech, but on the other hand, remuneration may not be well

designed to induce incentives to innovate in the first place. That is,

the adoption of Fintech, and the greater competition induced by it,

may make existing regulation (e.g., capital requirements) less effective.

Consequently, the emphasis on regulation of remuneration to help

restrict risk taking may increase. However, to get to the point where

“traditional banks”embrace Fintech, bankers will have to take risk to

innovate. If the current regulation of remuneration is too tight in the

sense that it dampens the speed of the adoption of Fintech by “tradi-

tional”banks, it may have a detrimental impact on the stability of the

banking industry (Beck et al., 2016; Wang et al., 2021).

Finally, climate change and an increasing focus on a broader envi-

ronmental, social, and governance (ESG) agenda bring challenges for

the financial industry (including banks) that have not been a focus of

attention of the regulators dealing with GFC issues. Given that adop-

tion of the sustainability agenda will require fundamental changes to

investment strategies, the pressure of the post-GFC reforms to

reduce risk taking may act against such changes. Although climate

change increases long-term risk exposure, financing the innovation

that is needed to contribute to offsetting climate change may be asso-

ciated with a short-term decrease in banks' profitability in comparison

with preserving the status quo even though the status quo is not sus-

tainable in the long term. It is, therefore, important to understand

whether the remuneration policies introduced after the GFC to curb

risk taking stimulate or restrict the adoption of sustainable policies

and strategies.

There are good reasons to suspect that they may be restrictive.

The post-GFC reforms were designed to weaken the management–

shareholder alignment induced through variable pay that, although

found to be effective in mitigating agency conflicts in non-financial

firms (Holmström, 1979; Jensen & Meckling, 1976),

2

creates consider-

able issues when adopted by financial institutions (e.g., Bebchuk

et al., 2010; Beltratti & Stulz, 2012; Berger et al., 2016; DeYoung

et al., 2013). Yet, even if the post-GFC reforms succeeded in

restricting banks from making money at any cost, they may not be

sufficient to steer banks towards strategies that ensure that they

make money in a socially, economically, and environmentally sound

manner. The increasing focus of policy makers on “encourage(ing) a

strong ‘tone from the top’on ESG, supported by clear accountability

for ESG claims and promises, and the right incentives –including

through remuneration”may require the rethinking and redesigning of

existing remuneration structures (Financial Conduct Authority

[FCA], 2022).

3

The objective of this paper is to provide a comprehensive discus-

sion of the current state of the literature on the effects of the bankers'

remuneration regulations that were introduced during and after the

GFC. It does not discuss the question of whether and how gover-

nance of banks (and CEO's remuneration in particular) affects risk tak-

ing since this is well documented (e.g., John et al., 2016; Srivastav &

Hagendorff, 2016) but is focused on what effects the restrictions on

the structure and timing of executive and non-executive remuneration

have had on remuneration itself and the reduction of risk taking. The

paper also discusses potential consequences of the remuneration

reforms on the speed of adoption of Fintech and the sustainability

agenda by banks. The paper mainly focuses on the European

162 ZALEWSKA