This paper examines the effect of a bonus cap on the compensation structure of top earners in the Dutch banking sector. Following concerns that performance-based pay may induce excessive risk-taking, regulators introduced caps on variable compensation. This paper analyzes how such regulation affects the composition of pay. The identification strategy exploits a unique institutional setting in which banks with their statutory seat in the Netherlands are subject to a stricter bonus cap than banks headquartered in other EU countries, while operating in the same market. This paper uses administrative microdata and a difference-in-differences approach to compare compensation outcomes across these groups before and after the introduction of the Dutch bonus cap in 2015. Consistent with the predictions of a principal–agent model of incentive contracting, the hourly variable wage decreases by 23 percent, while the hourly fixed wage component increases by 12 percent. The findings indicate that compensation regulation reshapes the composition of pay.
Rutten et al. (2026) studied this question.