The effect of a bonus cap on compensation structure in the banking sector

We study the effect of a bonus cap on compensation structure among top earners in the Dutch banking sector. Our identification strategy exploits a unique setting in which banks with their statutory seat in the Netherlands need to comply with the bonus cap, while banks with their statutory seat in other EU countries do not. From a theoretical perspective, the introduction of a bonus cap is expected to reduce the variable component of compensation and increase the fixed component. We test these predictions using a difference-in-differences design. Consistent with the theory, we find that the hourly variable wage decreases by 23 percent, while the hourly fixed wage component increases by 12 percent.