Executive Compensation, Bank-Owned Life Insurance, and Bank Holding Company Performance
49 Pages Posted: 9 Jul 2016 Last revised: 14 Jul 2016
Date Written: July 7, 2016
Bank-owned life insurance (BOLI) is life insurance purchased by bank holding companies (BHCs) for key employees, whose proceeds can be shared by the company and employees' heirs. We investigate whether and how executive compensation affects BOLI and whether BOLI use affects BHC performance. Using a sample of 2,041 firm-year observations from 2004 through 2013, we find a statistically significant positive relation between CEO compensation and BOLI, supporting the notion that BOLI is a complement to other forms of compensation. Further, we provide evidence that increases in BOLI, both relative to total assets and relative to other BHCs, benefit shareholders. This suggests the incentive effect of BOLI on BHC executives outweighs the potential agency problem of BOLI. The results are robust across various measures of BOLI and model specifications. Our results imply that ex-ante incentives embedded in BOLI motivate BHC managers to enhance shareholder value.
Keywords: Corporate governance, executive compensation, bank-owned life insurance (BOLI), bank holding company (BHC), BHC performance
JEL Classification: G21, G22, G34
Suggested Citation: Suggested Citation