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Risk Management in the Business Process by David R. Koenig

This weblog looks to promote the use of risk management as an enhancement to the business decision making process. It is the author's belief that risk management can only realize its full potential when it has become ingrained as a normal part of every business decision.

 

December 04, 2007

The Impact of Outside Monitoring on CEO Incentives

An interesting paper from the New York Fed was released last week that studies and conveys evidence confirming two hypoteheses regarding CEO incentives and risk-taking at banks:

that the pay-for-performance sensitivity of bank CEO compensation:

(1) decreases with the total leverage ratio and
(2) increases with the intensity of monitoring provided by regulators and nondepositor (subordinated) debtholders

The understanding of human behavior via incentives, especially among highly-influential and/or highly-compensated employees is critical to any enterprise risk management program and to board governance. I hope that you find this paper to be of interest.

Posted by dkoenig at 10:57 AM | Comments (0)