Bank CEOs, Inside Debt Compensation, and the Global Financial Crisis

55 Pages Posted: 14 Mar 2010 Last revised: 13 Aug 2013

Frederick Tung

Boston University School of Law

Xue Wang

Ohio State University - Fisher College of Business

Date Written: December 11, 2012

Abstract

Bank executives’ compensation has been widely identified as a culprit in the Global Financial Crisis, and reform of banker pay is high on the public policy agenda. While Congress targeted its reforms primarily at bankers’ equity-based pay incentives, empirical research fails to show any correlation between bank CEO equity incentives and bank performance in the Financial Crisis. We offer an alternative analysis, hypothesizing that bank CEOs’ inside debt incentives correlate with reduced bank risk taking and improved bank performance in the Crisis. A nascent literature shows that inside debt may dampen CEOs’ risk taking incentives. Unlike the industrial firms that have been the main focus of this literature, however, banks are subject to pervasive regulatory oversight to constrain risk taking. Therefore, the transmission of risk taking incentives through executive pay structure may not be straightforward and cannot be taken for granted. Nevertheless, we find evidence consistent with our hypotheses. Our empirical evidence provides a rationale for the use of inside debt compensation in structuring executive compensation in the banking context.

Keywords: banks, financial crisis, banking regulation, CEO compensation, inside debt, corporate governance, agency costs of debt, Moral Hazard, Financial Institutions

JEL Classification: G28, G38, G21, G30, G20, K23, K22, J33

Suggested Citation

Tung, Frederick and Wang, Xue, Bank CEOs, Inside Debt Compensation, and the Global Financial Crisis (December 11, 2012). Boston Univ. School of Law Working Paper No. 11-49. Available at SSRN: https://ssrn.com/abstract=1570161 or http://dx.doi.org/10.2139/ssrn.1570161

Frederick Tung (Contact Author)

Boston University School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Xue Wang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-1330 (Phone)
614-292-2118 (Fax)

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