The Vexed Issue of Bankers' Pay: Is It Now Time for Cocos?

Abstract

Although much has been written with regard to the use of contingent convertible bonds—popularly known as CoCos—in satisfying banks' stricter capital adequacy requirements, there has been relatively little discussion about the merits of using these instruments as a form of variable remuneration for banking executives. In seeking to fill this gap in the literature, we argue that, notwithstanding the case for or against the use of such instruments in satisfying banks' capital adequacy requirements, CoCos have, by helping to improve the link between risk and reward, a viable role to play in addressing legitimate concerns about remuneration arrangements in the banking sector. However, if the use of CoCos—even in this more limited context—is to be effective, much depends on how they are viewed by regulators. We argue that, in combination with other remuneration mechanisms, CoCos represent an improvement on existing arrangements with regard to the means by which banking executives are remunerated.