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New research on banks’ executive bonuses

The research project entitled “EXECUTIVE BONUSES CLAWBACK: THE WORLD’S LARGEST BANKS CASES” conducted by member of International Center for Banking and Corporate Governance Olga Afanasyeva has been finished.

The current post-crisis status of most world countries leads to paying more attention to improving of risk governance functions. It is mostly concerned to banks because of the risky nature of their business. Before the crisis the executive compensation in most banks was excessive that, in turn, led to systemic risk growth. According to transaction cost theory bank governance is focused at effective accomplishment of bank transactions. In connection to the above theses the important task at the time is improving the system of executive remuneration in order to ensure the lower bank risk level. With this aim in 2008 Swiss bank UBS has implemented new compensation system that assumes the clawback provision. This clause concerning the deferred awards of senior managers’ remuneration is included to increase their accountability for loss-creating or fraud behavior. The paper highlights the peculiarities of executive compensation clawback provision practice that differ in biggest European banks. Furthermore, similar practice has been started in financial institutions of USA, specific of which is researched in the paper. Along with the risk management function of this remuneration model problem issues has been defined, in particular the probability of clear identification of the triggering event for bonuses clawback; the legitimacy of clawing back of retired executives’ bonuses. Due to recent implementation of clawback policy its effect on bank financial performance is still early to analyze. Thus, the paper concludes that the character of this remuneration system corresponds with ownership structure and market concentration. We found positive correlations between banking market concentration level and “strictness” of executive compensation policy, as well as bank ownership concentration, degree of state ownership.

The results of the research will be presented at the International scientific conference "Corporate Governance: a Search for Advanced Standards in the Wake of Crisis" on May 8, 2014 in Milan (Italy).

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