In the language of regulators, interwoven with instantaneous actions, subsequent and often very multi-layered consequences of actions that cause or increase exposure to the financial market. Good incentive systems are characterized by ensuring an appropriate balance between profit and liability, as is usually the case with longer-term business relationships. – In the course of the subprime crisis, incorrect incentive systems aimed only at short-term success (perverse fundamental drivers) were revealed as one of the main triggers of the crisis. As a result, compensation systems for all traders were called for that were geared to persistently attainable profit rather than short-run profit, thus inciting high-risk transactions. – An example of a conspicuous misalignment of incentives: in October 2007, the U.S. bank Merrill Lynch paid its CEO Stan O’Neal a severance package of USD 161.5 million to reward the results of the previous years, which, however, were largely based on subprime loans. In the following year, Merrill Lynch had to absorb write-downs of over USD 52 billion and lost its independence in the wake of its takeover by Bank of America. – See stock option, bonus, gratuity, handshake, golden, institution compensation regulation, risk, risk perception, executive compensation. – Cf. Annual Report 2013 of BaFin, p. 72 f. (new statutory requirements for compensation systems since the beginning of 2014).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk
https://www.jung-stilling-gesellschaft.de/merk/
https://www.gerhardmerk.de/

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