Since the financial crisis of 2008, clawback provisions have been implemented by several high-profile banks and are also required by regulators in order to mitigate the cost of financial failures and to deter excessive risk taking. We construct a model to investigate the long-term effect on the bank's revenue of deferring (escrowing) a trader's bonuses to facilitate clawback. We formulate the question by setting up an infinite-horizon dynamic programming model. Within this model, the trader's optimal investment and consumption strategy, with and without bonus escrow, can be expressed by explicit analytic formulas. These formulas enable calculation and comparison of the bank's total expected revenue under the two bonus payout schemes. The results of the comparison depend on the parameters describing the trader's risk appetite, the discount factor, and the bank's level of patience, in addition to the market parameters. In particular, when the bank's total expected discounted revenue is finite under both types of bonus payment schemes and the bank is sufficiently patient, the bank benefits by escrowing the trader's bonus, although not escrowing the trader's bonus brings better short-term revenue.


  1. optimal investment
  2. deferred compensation
  3. clawback
  4. dynamic programming
  5. principal-agent

MSC codes

  1. Primary
  2. 91G80
  3. 90C39; Secondary
  4. 92G10
  5. 91B40

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Information & Authors


Published In

cover image SIAM Journal on Financial Mathematics
SIAM Journal on Financial Mathematics
Pages: 1191 - 1229
ISSN (online): 1945-497X


Submitted: 27 October 2021
Accepted: 5 July 2022
Published online: 15 September 2022


  1. optimal investment
  2. deferred compensation
  3. clawback
  4. dynamic programming
  5. principal-agent

MSC codes

  1. Primary
  2. 91G80
  3. 90C39; Secondary
  4. 92G10
  5. 91B40



Funding Information

National Science Foundation https://doi.org/10.13039/100000001 : DMS-0903475

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