Handbook of Safeguarding Global Financial Stability

Chapter 27

Advantages and Drawbacks of Bonus Payments in the Financial Sector

P. Sinclair

University of Birmingham, Birmingham, UK

Outline

Introduction

Principal–Agent Theory: Why Bonuses may be Beneficial

Why Ideal Contracts may well be Unavailable

Implications for Contracts in the Financial Sector

Assessing the Case for Profit-Related Pay

Are Financial Sector Bonuses Actually Deserved?

Arguments against Restricting Financial Sector Bonuses

Some Technical Difficulties

Some Specific Practical Problems with Bonuses

Implementation

Concluding Comments

References

Introduction

The scale of bonuses paid by the world’s major banks in recent years is astounding. Cuomo (2009) presents the evidence of bonus payments and profits for nine leading US banks ...