Electronic copy available at: http://ssrn.com/abstract=1809789 Electronic copy available at: http://ssrn.com/abstract=1809789 1 Bankers’ Compensation and Prudential Supervision: The International Principles Guido Ferrarini ∗ Chapter for the forthcoming Research Handbook on Executive Compensation (Jennifer Hill & Randall Thomas, eds., Edward Elgar Press) In the quest for possible causes of the recent financial crisis, commentators often argue that bank executives had poor incentives. 1 Critics claim, in particular, that executive compensation was not properly aligned with long-term performance (Bebchuk and Fried 2010; Posner 2009), while regulators seek ways to change practices in order to restore this alignment. At least two questions arise with respect to incentive practices. The first is whether executive compensation at banks before the crisis was predominantly short-term oriented. Academics and politicians answer this question differently. The latter argue, with the support of the media, that widespread short-term incentives to bank managers were at the root of the recent crisis. On the academic side of the current debate, recent empirical studies reveal no proof that short-term incentives led to excessive risks. In particular, an empirical study examined in Part 1 of this Chapter shows that, in the United States at least, pay was generally aligned with the long-term interest of shareholders (Fahlenbrach and Stulz 2010). Similar studies are not available for Europe because data needed to calculate the value of stock options and long-term incentives is generally not publicly available. 2 The second question, which is further analyzed in Part 1, is whether banking regulation should cover ∗ Professor of Business Law, University of Genoa; Director, Centre for Law and Finance; Fellow, European Corporate Governance Institute 1 This paper draws on Guido Ferrarini and Maria Cristina Ungureanu, Economics, Politics, and the International Principles for Sound Compensation Practices. An Analysis of Executive Pay at European Banks, 64 Vanderbilt Law Review 2, 431-502 (2011). 2 However, our study shows that, before the crisis, most banks declared that their remuneration policies were fairly balanced between fixed and variable pay and included long-term incentives. This was true for both ailing and non-ailing banks, making it unlikely that, before the crisis, bank managers followed a short- term approach induced by the structure of their incentives (Ferrarini and Ungureanu 2010 (2)).