Bank Stability and Managerial Compensation

Journal of Banking & Finance 37 (2013) 799–813

15 Pages Posted: 18 Jun 2014

See all articles by Gang Bai

Gang Bai

Southwestern University of Finance and Economics (SWUFE)

Elyas Elyasiani

Temple University - Department of Finance

Date Written: October 26, 2011

Abstract

We investigate the relationship between insolvency risk and executive compensation for BHCs over the 1992-2008 period. We employ CEO compensation sensitivity to risk (vega) and pay-share inequality between the CEO and other executives as measures of compensation and employ a system model to account for the endogeneity problem between vega and risk. Five main results are obtained. First, CEO compensation sensitivity to risk of BHCs has risen in response to deregulation to resemble those of the industrial firms. Second, higher vegas lead to greater bank instability. Third, the association between bank stability and managerial compensation is bi-directional; higher vegas induce greater risk and vice versa. Fourth, BHCs in the next to the largest-size group increase CEO vegas the most and have the strongest potential to create instability. Fifth, increased pay-share inequality has effects opposite to those of the increase in vega; greater pay-share inequality is associated with greater stability.

Keywords: Executive compensation, Insolvency risk, Bank holding company, Pay inequality, Vega, Too big to fail

Suggested Citation

Bai, Gang and Elyasiani, Elyas, Bank Stability and Managerial Compensation (October 26, 2011). Journal of Banking & Finance 37 (2013) 799–813. Available at SSRN: https://ssrn.com/abstract=2451136

Gang Bai

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Elyas Elyasiani (Contact Author)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-5881 (Phone)
215-204-5698 (Fax)

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