Boston University School of Law

 

Pay for Regulator Performance

Frederick Tung
Boston University School of Law

M. Todd Henderson
University of Chicago Law School

Boston University School of Law, Working Paper No. 11-43
(September 13, 2011)

U of Chicago Law & Economics Olin Working Paper No. 574.
(August 24, 2011)

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.

Number of Pages in PDF File: 78

Keywords: bank, bank examiner, banking regulation, incentive pay, pay for performance, financial crisis

JEL Classifications: G21, G28, G38, J33, K23, L51

Size: 756 KB

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Suggested Citation:

Frederick Tung and M. Todd Henderson, "Pay for Regulator Performance," SSRN No. 1916310; U of Chicago Law & Economics, Olin Working Paper No. 574; Boston University School of Law Law & Economics Working Paper No. 11-43.

Contact Information

Frederick Tung
Professor of Law

Boston University School of Law
765 Commonwealth Avenue
Boston, MA 02215

Email:

fredtung@bu.edu

 

M. Todd Henderson
Professor of Law
University of Chicago Law School
1111 E. 60th Street
Chicago, IL 60637

Email:

toddh@uchicago.edu

Phone: 773-834-4168
Fax: 773-702-0730

 

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