Social and Behavioral Sciences Commons^™

The Bonus-Driven “Rainmaker” Financial Firm: How These Firms Enrich Top Employees, Erode Shareholder Value And Create Systemic Financial Instability, Economic Crises And Rising Inequality, James Crofty

PERI Working Papers

We recently experienced a global financial crisis so severe that only massive rescue operations by governments around the world prevented a total financial market meltdown and perhaps another global Great Depression. One precondition for the crisis was the perverse, bonus-driven compensation structure employed in important financial institutions such as investment banks. This structure provided the rational incentive for key decision makers in these firms (who I call “rainmakers”) to take the excessive risk and employ the excessive leverage that helped create the bubble and made the crisis so severe. This paper presents and evaluates extensive data on compensation practices in …