Incentive Features in CEO Compensation: The Role of Regulation and Monitored Debt

41 Pages Posted: 31 Oct 2008

See all articles by Kose John

Kose John

New York University (NYU) - Department of Finance

Hamid Mehran

Independent

Yiming Qian

University of Connecticut

Date Written: October 2006

Abstract

We study CEO compensation in the banking industry by taking into account banks unique claim structure in the presence of two types of agency problems: the standard managerial agency problem as well as the risk-shifting problem between shareholders and debtholders. We empirically test two hypotheses derived from this framework: (1) the pay-for-performance sensitivity of bank CEO compensation decreases with the total leverage ratio; and (2) the pay-for-performance sensitivity of bank CEO compensation increases with the intensity of monitoring provided by regulators and nondepository (subordinated) debtholders. We construct an index of the intensity of outsider monitoring based on four variables: subordinated debt ratio, subordinated debt rating, non performing loan ratio and BOPEC rating assigned by regulators. We findsupporting evidence for both hypotheses. Our results hold after controlling for the endogeneity among compensation, leverage and monitoring. They are robust to various regression specifications and sample criteria.

Keywords: CEO compensation, pay-for-performance sensitivity, risk-shifting, agency problems, banking, regulation, subordinated debt

Suggested Citation

John, Kose and Mehran, Hamid and Qian, Yiming, Incentive Features in CEO Compensation: The Role of Regulation and Monitored Debt (October 2006). NYU Working Paper No. CLB-06-018. Available at SSRN: https://ssrn.com/abstract=1291606

Kose John (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Hamid Mehran

Independent ( email )

No Address Available

Yiming Qian

University of Connecticut ( email )

2100 Hillside Road U-1041F, Room 452
Storrs, CT 06269
United States
860-486-2774 (Phone)

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