CECL Adoption and the Contractual Usefulness of Accounting Earnings in Bank CEO Compensation

The adoption of the Current Expected Credit Losses (CECL) model, a new methodology for accounting for expected credit losses, has significantly increased bank earnings volatility. Using a difference-in-differences design around adoption, we examine how more volatile earnings impact CEO compensation design. We document post-CECL, bank CEO pay becomes less sensitive to earnings, but more sensitive to other performance measures, such as stock returns and revenues. Additionally, total executive compensation increases, consistent with the higher risk premia demanded by bank executives. Overall, our results suggest that compensation committees view accounting earnings as having lower contractual usefulness for incentives after CECL.

Keywords: Pay-Performance Sensitivity, Earnings-Based Incentive Compensation, CECL

JEL Classification: D8, J33, G21, G32, M41, M48

Suggested Citation: Suggested Citation

Babenko, Ilona and Bennett, Benjamin and Bhat, Gauri and Milbourn, Todd T., CECL Adoption and the Contractual Usefulness of Accounting Earnings in Bank CEO Compensation (July 19, 2024). SMU Cox School of Business Research Paper No. 24-8, Olin Business School Center for Finance & Accounting Research Paper No. 2024/12, HKU Jockey Club Enterprise Sustainability Global Research Institute - Archive, Available at SSRN: https://ssrn.com/abstract=4899741 or http://dx.doi.org/10.2139/ssrn.4899741