How to Fix Bankers’ Pay

Lucian Bebchuk is a Professor of Law, Economics, and Finance at Harvard Law School.

In a recent essay, written for a special issue of the American Academy of Arts and Sciences’ Daedalus journal on lessons from the financial crisis, I discuss how bankers’ pay should be fixed.

The essay, How to Fix Bankers’ Pay, discusses two distinct sources of risk-taking incentives: first, executives’ excessive focus on short-term results; and, second, their excessive focus on results for shareholders, which corresponds to a lack of incentives for executives to consider outcomes for other contributors of capital. I then discuss how pay arrangements can be reformed to address each of these problems and conclude by examining the role that government should play in bringing about the needed reforms.

The essay is available here. It draws on, and provides an accessible summary of the analysis developed in, three studies:

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