The aim here is to align managerial incentives with those of wider stakeholders, specifically creditors, so mitigating risk-shifting incentives. This is not a new idea. In their original paper on risk-shifting, Jensen and Meckling (1976) proposed structuring a CEO’s compensation such that it was aligned with the firms’ debt-toequity ratio. In practice, companies in general, and financial firms in particular, have fallen well short of that objective. Fewer than 1% of bank CEOs have been found to have remuneration packages with debt-to-equity ratios greater than their firms. 22 The new EU bonus cap rules also arguably weaken the link between performance and compensation as they shrink the proportion of variable pay and make it harder to cut back total remuneration. 23 Since the crisis, consideration has been given by both academics and policymakers to switching remuneration practices towards debt-like instruments (for example, Becht, Bolton and Roell (2011), PCBS (2013)). This appears to have had some policy impact. For example in Europe, payment in debt instruments is now permitted under the new Capital Requirements Directive IV (CRD IV). To date, however, there are only limited signs of remuneration practices having shifted significantly towards debt. UK banks provide one case study. Their structures remain heavily skewed towards equity, at around 50–75% of total pay, compared with around 5–15% in debt (Chart 10). Among non-financial firms, the balance of pay appears, if anything, to be even more heavily skewed towards equity. A second strand of the policy debate involves lengthening the horizon of remuneration contracts.

Such risks do not necessarily materialize, but when they do, the repercussions are dramatic. Altogether, considering the different tools are potentially at the disposal of policy-makers, it is crucial to gauge the short- to long-run benefits, limits and risks associated with each of them. I do not think that confidence would really benefit from measures that are known to carry non-negligible long-run risks, even if some short-term relief is expected from them. As a way of conclusion, let me shortly consider the progress that has already been made to solve this crisis and list some of the remaining challenges ahead. First, it seems important to welcome the significance of the fiscal stabilization programs many euro-area governments have committed to. As mentioned earlier, this is a necessary step to restore confidence in a sustainable way. Although this is a difficult task, the timely delivery of the promised reforms is necessary. Second, beyond individual policy actions, the recent progress obtained in the design of a common fiscal governance in the euro area is of the essence. Indeed, many important decisions have been taken in that direction: The creation of the EFSF and the ESM or the agreement on fiscal rules and surveillance mechanisms during the Brussels EU Summit on December the 8th and 9th are historical steps in the right direction. Obviously, most of these newly established institutions, rules and processes would have been unthinkable four years ago. This makes me really optimistic about our prospects for restoring stability and growth in the euro area.