Abstract
How do banks remunerate risk managers and what are the implications for risk-taking? Studying 127 German banks during the years 2003 to 2007, we show that risk managers' remuneration is positively aligned with performance-linked pay in front offices (FOs). When bonuses in FOs increase by one Euro, the bonus of a risk manager increases by 13.6 to 33.5 Cents, depending on the risk manager’s seniority. Risk-sharing among employees or labor market competition do not explain this finding. Banks with more aligned incentive pay between risk management and FOs during the years before the crisis of 2008-2009 performed better in the crisis.
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