Regulating Deferred Incentive Pay
|Research Area:||Financial Regulation|
The paper evaluates regulatory proposals mandating the deferral of bonus payments and claw-back clauses in the financial sector. We study a broadly applicable principal agent setting, in which the agent exerts e§ort for an immediately observable task (acquisition) and a task for which information is only gradually available over time (diligence). Optimal compensation contracts trade of the cost and benefit of delay resulting from agent impatience and the informational gain. Mandatory deferral may increase or decrease equilibrium diligence depending on the importance of the acquisition task. The authors provide concrete conditions on economic primitives that make mandatory deferral socially (un)desirable.