Laurent Weill (University of Strasbourg) - Do Risky Banks Pay their Employees More?

BOFIT Seminar - Laurent Weill (University of Strasbourg) - Do Risky Banks Pay their Employees More?

Co-authors: Laetitia Lepetit (University of Limoges) and Frank Strobel (University of Birmingham) 

Abstract:

This paper examines the effect of bank risk on employee compensation. Using a large sample of 11,806 U.S. commercial banks from 1990 to 2022, we find that higher bank risk increases wage compensation up to a certain threshold, after which the effect is reversed. Our interpretation for this inverted U-shaped relationship is that higher risk must be associated with higher pay for bank employees to compensate for bankruptcy costs. However, when bank risk reaches a high level, bank employees reduce their demands because higher compensation can increase the risk of failure. We find that the inverted U-shaped relationship between bank risk and wage compensation is observed only for small banks. We further show that the inverted U-shaped relationship only takes place in the presence of positive economic conditions and of low bank concentration. We also observe that past risk favors the emergence of the effect of bank risk on employee compensation. Overall, our results support our interpretation that bank employees demand higher compensation in the presence of higher bank risk up to a certain level of risk.

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