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Determinants of the use of financial incentives in investment banking

David Nash

Working Papers from Centre for Business Research, University of Cambridge

Abstract: This paper examines the use of incentive pay schemes within the financial services sector in London. Various theories of wage determination are reviewed with particular attention placed on the principal-agent literature as a framework for analysing the use of incentive pay. This is combined with case study interviews and a number of hypotheses regarding the use of bonuses. Quantitative analysis of a detailed industry-wide survey validates the hypothesis that those occupations where output is easily identifiable receive higher bonus pay. The proximity of an occupation to the revenue generating activity within the organisation is also found to be significant in determining bonus levels, as is job grade within the organisation. The paper concludes that principal-agent theories of wage determination are useful in understanding the use of bonus pay in the City, but need to be modified to take account of particular institutional characteristics, in particular the power of individual agents.

Keywords: Incentive pay; principal-agent theory; investment banking (search for similar items in EconPapers)
JEL-codes: G24 J31 J33 M52 (search for similar items in EconPapers)
Date: 2003-03
New Economics Papers: this item is included in nep-fin and nep-rmg
Note: PRO-2
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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