Executive Compensation and Business Policy Choices at U.S. Commercial Banks*

Abstract

This study examines whether and how the terms of CEO compensation contracts at large commercial banks between 1994 and 2006 influenced, or were influenced by, the risky business policy decisions made by these firms. We find strong evidence that bank CEOs responded to contractual risk-taking incentives by taking more risk; bank boards altered CEO compensation to encourage executives to exploit new growth opportunities; and bank boards set CEO incentives in a manner designed to moderate excessive risk-taking. These relationships are strongest during the second half of our sample, after deregulation and technological change had expanded banks' capacities for risk-taking.

Association between Key Management Personnel Remuneration and the Performance of Authorized Deposit-Taking Institutions in Australia

“…This result is consistent with the implication of agency theory as well as the evidence provided from other developed countries outside Australia (Jensen and Murphy 1990;Coles et al, 2006;Basu et al, 2007;DeYoung et al, 2013), but in contract to findings of most prior published literature in the Australian (Capezio et al, 2007;Craswell et al, 1997;O"Neill and Iob, 1999).…”

“…Therefore, corporate performance should be positively associated with key management personnel remuneration. Although some studies of developed countries outside Australia suggested a weak pay-performance (Gregg et al, 1993;Conyon et al, 1995), Most studies taken in developed countries found a positive association between key management personnel remuneration and corporate performance (Jensen and Murphy 1990;Conyon, 1997;Coles et al, 2006;Basu et al, 2007;DeYoung et al, 2013;McKnight, 1996;Ingham and Thompson, 1995), which is consistent with the implication of agency theory.…”

“…Then, Conyon et al (1995), Main et al (1996), Benito and Conyon (1999) observed weak pay-performance association. Most recent studies have found a positive and significant association between key management personnel remuneration and corporate performance (Coles et al, 2006;Basu et al, 2007;DeYoung et al, 2013), thus this study expects total key management personnel remuneration (TR) to be one of major variables that might influence corporate performance.…”

“…Consequently, the theory suggests that there should be a positive association between executive remuneration and corporate performance as shareholders have an intention to motivate managers to achieve higher shareholder return by aligning executive remuneration with corporate performance. While some prior studies find that there is no or a weak pay-performance association (Girma et al, 2007;Fahlenbrach and Stulz, 2009;Gropp and Kohler, 2010), a majority of studies have found a positive and obvious pay-performance association (Coles et al, 2006;Basu et al, 2007;DeYoung et al, 2013). For example, Rosen (1981) argued that larger companies with better corporate performance should offer higher levels of pay and be matched with more able key management personnel of an efficient labour market.…”

“…Financial crisis made short-term pay-for-performance to be criticized by observing that banks with more short-term pay-for-performance bonus in their executive remuneration package perform worse during financial crisis because more risk inducing compensation structure had riskier policies (DeYoung et al, 2013). According to Gervais at el.…”