CEO Remuneration : A study on the impact of the Capital Requirement Directive IV’s bonus cap on the variable remuneration

Abstract: Background: Over the past decades, there has been a massive increase in the level of CEO remuneration, which has not been in line with the growth in company earnings and firm size. This massive increase in particularly variable remuneration was one of the main causes to the financial crisis during 2007-2008. As a result of the financial crisis, the issue of excessive CEO remuneration has become increasingly highlighted. Thus, the regulators have been striving to come up with new regulations to align the long-term interest of the banks with the variable remuneration. A regulation that has been implemented by the EU countries to combat this issue is the bonus cap that is an amendment to CRD IV. The bonus cap limits the variable remuneration to 100% of the fixed remuneration, with the exception that it can be raised to 200% if approved by shareholders. However, the bonus cap has not been as efficient as expected. Purpose: The purpose of this thesis is to examine how the bonus cap has affected the variable CEO remuneration. This will be done by analysing and comparing the total remuneration within the 20 largest banks in EU. The investigation is concentrated on the time period 2012-2015. Method:  A sample of 20 banks has been chosen based on three criterions, namely the banks with the largest amount of assets, banks with EU headquarters and banks that provide the information necessary for the research. When collecting the data needed to fulfil the purpose, quantitative data in form of numbers from the banks financial reports was retrieved from their respective website. Conclusion: The results show that the variable remuneration has increased since the implementation of the bonus cap. This increase is likely driven by the increase in fixed remuneration. Another consequence of the bonus cap is that the variable remuneration has become more constant in relation to the fixed remuneration. The last observed consequence is a diminished correlation between performance and pay, meaning that the variable remuneration has had a weakened dependence on the performance of the bank. The results of the development in variable remuneration provide an insight about the effectiveness of the bonus cap, what impact it has had and that an improvement of the bonus cap is desirable.