How can improving the incentives of bank executives restrain bank risk taking?

Question

Quizplus · Accepted Answer

Improving the incentives of bank executives can restrain bank risk taking by compensating bank executives based on the long-run survival and performance as well as eliminating compensation features that reward failures such as golden parachutes. Rewarding the bank executives based on the accounting earnings alone may incentivize short-term gains at the expense of long-term risks. Therefore, options A and B, when implemented together, can provide a more effective solution to managing risk-taking in banks.

How Can Improving the Incentives of Bank Executives Restrain Bank