REVISION: Paying for Risk: Bankers, Compensation, and Competition

By Charles K. Whitehead

Efforts to control bank risk address the wrong problem in the wrong way. They presume that the financial crisis was caused by CEOs who failed to supervise risk-taking employees. The responses focus on executive pay, believing that executives will bring non-executives into line — using incentives to manage risk-taking — once their own pay is regulated. What they overlook is the effect on non-executive pay of the competition for talent. Even if executive pay is regulated, and executives act in the bank’s best interests, they will still be trapped into providing incentives that encourage risk-taking by non-executives due to the negative externality that arises from that competition. Greater risk-taking can increase short-term profits and, in turn, the amount a non-executive receives, potentially at the expense of long-term bank value. Non-executives, therefore, have an incentive to incur significant risk upfront so long as they can depart for a new employer before any losses ...

Charles K. Whitehead Myron C. Taylor Alumni Professor of Business Law and Director, Law, Technology and Entrepreneurship Program
Photo of Charles Whitehead

Contact Information

Cornell University
222 Myron Taylor Hall
Ithaca, NY 14853-4901

Phone: (607) 255-9498
Fax: (607) 255-7193


Gina Jackson
Cornell Law School
315 Myron Taylor Hall
Ithaca, NY 14853-4901

Professional Biography

Charles K. Whitehead specializes in the law relating to corporations, financial markets, and business transactions.

After clerking for the Hon. Ellsworth A. Van Graafeiland, U.S. Court of Appeals (2nd Circuit), Professor Whitehead practiced in the United States, Europe, and Asia as outside counsel and general counsel of several multinational financial institutions. His practice included representation involving IPOs and other exempt and registered securities offerings (from start-ups to seasoned global issuers), acquisitions and other strategic transactions, derivatives and other complex financial instruments, and loan and other credit transactions.

Before joining Cornell, he was on the faculty of the Boston University School of Law and was a research fellow at Columbia Law School.

Professor Whitehead's current scholarship focuses on the financial markets, financial regulation, and corporate governance.


B.A. magna cum laude, Cornell University
J.D., Columbia Law School (James Kent Scholar; Harlan Fiske Stone Scholar)