The Effect of a Bonus Cap on Compensation Structure in the Banking Sector

This paper examines the effect of a bonus cap on the compensation structure of top earners in the Dutch banking sector. Following concerns that performance-based pay may induce excessive risk-taking, regulators introduced caps on variable compensation. This paper analyzes how such regulation affects the composition of pay. The identification strategy exploits a unique institutional setting in which banks with their statutory seat in the Netherlands are subject to a stricter bonus cap than banks