Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter. Back in 1997, Daniel Davies wrote a short article called “Remuneration and Risk” for what was then known as the Bank of England Financial Stability Review (now Report). These early stylised facts certainly hung around for a long time. Set out in words, it might be something like “because of limited liability, variable compensation schemes have an option-like pay-off structure, which means that they incentivise employees to increase risk as they benefit fully from the upside but are not fully penalised for the downside”. Anyway, time passed, governments rose and fell, there were wars, financial crises and pandemics, I got married and watched my children grow to adulthood, and here we are in 2026, where the latest BIS Quarterly Review has recently published a review of the regulation of remuneration systems in banking. Hello my old friend: This kind of chart can fairly be seen as the intellectual basis for capping bankers’ bonuses. In order to mitigate the risk-taking incentives created by the asymmetric, option-like pay-off structure, it is necessary to either allow negative compensation or to remove the upper tail of potential rewards. And indeed, after the Great Financial Crisis of the 2000s, the European Union did introduce regulations prohibiting banks from paying out bonuses of more than twice the basic salary. What can I say — I feel terrible about this. For most of my banking career, I obviously tried to keep it quiet that I had played some minor part in providing the groundwork for what had to be one of the least popular regulations among traders of all time. Particularly as it doesn’t work. People just aren’t so short-termist as to think that the way to get rich in banking is to take a material risk of blowing up your employer. The BIS study demonstrates this empirically in a number of ways, using a variety of risk-taking metrics. This establishes quite clearly that the imposition of the European bonus cap had very little effect on bank risk-taking. The removal of the cap in the UK in 2023 might have had some small effect, but not very much. What does seem to work is to tackle the other side of the risk/return trade-off, using deferred bonuses to make negative compensation in practice possible. In other words, losses in one year can either result in clawback of bonuses which were awarded but deferred in previous years, or have an effect on the share price which reduces the value of equity-linked awards. The BIS finds that in nearly every case study they checked —

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