Managerial Compensation in Stressed Banks : Evidence from the ECB's AQR Stress Test

Bank compensation in distress is often regarded as special due to the prevalence of high bonus payments. I study European banks over the period 2014 to 2018 to determine how banks adjust compensation during distress in the post-crisis era. I use a novel hand-collected database to analyze compensation and employment of managerial employees at both the executive and non-executive level. Banks are classiffied as (un-)stressed based on the results of the ECB's 2014 stress test. As commonly observed for non-financial firms, distressed banks reduce overall wage expenses by reducing employment rather than cutting fixed or variable compensation. The convergence of bank behavior with that of non-financial firms might be due to post-crisis compensation regulation and bail-in rules