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

45 Pages Posted: 2 Sep 2009

See all articles by Robert DeYoung

Robert DeYoung

University of Kansas School of Business

Emma Y. Peng

Fordham University - Accounting Area

Meng Yan

Fordham University - Gabelli School of Business

Date Written: September 1, 2009

Abstract

This study examines whether and how the terms of CEO compensation contracts at large, publicly traded commercial banks between 1994 and 2006 influenced, and were influenced by, the risk-profiles of these firms. We find evidence linking contractual risk-taking incentives, which we proxy with standard measures of vega and delta, to risk-increasing business policy choices. Moreover, these linkages became stronger after 1999, when financial industry deregulation created new growth opportunities for commercial banks. Our results suggest that compensation committees provided new incentives for bank CEOs to exploit these growth opportunities, and also to shift from traditional on-balance sheet portfolio lending to less traditional investments (e.g., private-issue mortgage-backed securities) and nontraditional fee-generating activities. Apart from these strategic reallocations, our results also suggest that bank boards designed CEO compensation contracts to limit excessive risk taking, especially after deregulation.

Keywords: Executive compensation, business policy, commercial banks

JEL Classification: G21, G31, J33

Suggested Citation

DeYoung, Robert and Peng, Emma Y. and Yan, Meng, Executive Compensation and Business Policy Choices at U.S. Commercial Banks* (September 1, 2009). AAA 2010 Financial Accounting and Reporting Section (FARS) Paper. Available at SSRN: https://ssrn.com/abstract=1465996 or http://dx.doi.org/10.2139/ssrn.1465996

Robert DeYoung

University of Kansas School of Business ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-1806 (Phone)

Emma Y. Peng (Contact Author)

Fordham University - Accounting Area ( email )

1790 Broadway, 13th FL
New York, NY 10019
United States

Meng Yan

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Bronx, NY 10458
United States

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