A Unified Analysis of Executive Pay: The Case of the Financial Sector

45 Pages Posted: 24 May 2000

See all articles by Eli Talmor

Eli Talmor

London Business School

James S. Wallace

Claremont Colleges - Peter F. Drucker Graduate School of Management

Date Written: August 2001

Abstract

This study examines executive compensation determinants in the U.S. financial services sector. Multiple theories of executive pay are discussed and tested using a relatively homogenous sample. We perform an in-depth look at the corporate governance and ownership structure of the companies selected. The analysis is conducted for the financial sector as a whole and for each of three sub-groups: commercial banks, brokerage and other non-depository institutions, and insurance companies. Variables that proxy for managerial strategic discretion and task complexity are found to best explain CEO compensation. Corporate governance, including board characteristics and external ownership, is the second leading determinant of pay variation, while firm performance and CEO specific characteristics seem to play the least role. We explore the simultaneous relationship between compensation, firm performance, and board strength and find evidence that the board of directors provides a monitoring function and that a strong board appears to be a substitute with incentive compensation for aligning incentives. These findings, when viewed with subsequent firm performance, support an efficient contracting argument.

JEL Classification: G20, G32, G34, J33, M41

Suggested Citation

Talmor, Eli and Wallace, James S., A Unified Analysis of Executive Pay: The Case of the Financial Sector (August 2001). Available at SSRN: https://ssrn.com/abstract=215630 or http://dx.doi.org/10.2139/ssrn.215630

Eli Talmor

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 7000 (Phone)

James S. Wallace (Contact Author)

Claremont Colleges - Peter F. Drucker Graduate School of Management ( email )

The Drucker School of Management
1021 North Dartmouth Avenue
Claremont, CA 91711
United States
(909) 607-6063 (Phone)

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