As (2012) argued that this would increase banks’

As bonuses are extraordinary high which more often than not
is the reason for public outrage but their size fulfills certain purposes.
Bonuses in the banking sector take up two major tasks. Their first role is to
decrease the default risk for banks by reducing the carried costs in case of
poor returns. The other reason why bonuses account for up to 45% of the
comparatively high salaries of bankers is that they are also supposed to
incentivize the bankers to perform better which in return improves the performance
of the bank itself. However, there are two most possible ways
that bonuses can cause excessive risk taking: through asymmetric rewards and
penalties for performance or through badly set performance metrics. This is
outlined by the main findings of the reviewed papers. It is also the reason why
regulators have to be careful and provide optimal conditions for banking
industry to remain flexible in deciding on pay structure while having certain
controlling mechanisms in place. In the case of the UK, regulators implemented
mandatory bonus deferrals which were suggested by Conyon et al (2011). First
results provided by Kleymenova and Tuna (2017) show that they indeed delivered
the promised reduction of default risks. In contrast to this, the EU decided to
implement a bonus cap which restricts bankers’ bonuses to exceed their fixed
salaries, which was followed by the increase of the fixed part of pay. Thanassoulis
(2012) argued that this would increase banks’ default risk and the
shareholders’ reaction analyzed by Kleymenova and Tuna (2017) seems to confirm
this position. We urge future research to study the long-term implications,
positive and negative, of these two regulations to better assess their overall
impact. This way, it can provide better suggestions for regulators to optimise
their laws. After all, bonuses will remain important in the banking sector and
therefore carry a vital role for the wider economy. Better understanding them
and their impact will benefit more than just banks.