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These contracts bias investment choices toward correlated investment opportunities, and thus create systemic risk. Furthermore, we show that leverage amplifies all such effects. In the context of the banking industry, we analyze recent policy recommendations for firm managerial pay and show how shareholders optimally undo the policies\u2019 intended effects.<\/jats:p><jats:p>Received October 31, 2017; editorial decision August 21, 2018 by Editor Wei Jiang. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.<\/jats:p>","DOI":"10.1093\/rfs\/hhz028","type":"journal-article","created":{"date-parts":[[2019,2,28]],"date-time":"2019-02-28T20:31:27Z","timestamp":1551385887000},"page":"4304-4342","source":"Crossref","is-referenced-by-count":41,"title":["Incentive Pay and Systemic Risk"],"prefix":"10.1093","volume":"32","author":[{"given":"Rui","family":"Albuquerque","sequence":"first","affiliation":[{"name":"Boston College"}]},{"given":"Lu\u00eds","family":"Cabral","sequence":"additional","affiliation":[{"name":"New York University"}]},{"given":"Jos\u00e9","family":"Guedes","sequence":"additional","affiliation":[{"name":"Cat\u00f3lica Lisbon School of Business and Economics"}]}],"member":"286","published-online":{"date-parts":[[2019,3,4]]},"reference":[{"key":"2019101703390834000_B1","author":"Abudy,","year":"2017"},{"key":"2019101703390834000_B2","doi-asserted-by":"crossref","first-page":"224","DOI":"10.1016\/j.jfs.2009.02.001","article-title":"A theory of systemic risk and design of prudential bank regulation","volume":"5","author":"Acharya,","year":"2009","journal-title":"Journal of Financial Stability"},{"key":"2019101703390834000_B3","first-page":"36","article-title":"Caught between Scylla and Charybdis? 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