The Transformation of Banking and CEO Compensation
27 Pages Posted: 21 Mar 2003
We examine the compensation strategies of commercial bank holding companies (BHCs) over the period 1992-2000 to assess the impact of some fundamental changes in their business activities. In particular, we seek to determine whether CEO compensation is more closely tied to the presence of growth options and to risk than has been revealed by earlier research. We also specifically examine whether BHC entry into investment banking has influenced their compensation policies. Our evidence shows a stronger link between the presence of growth options and CEO compensation in the 1990s than observed in earlier studies and that pay-for-performance sensitivities are substantially larger for BHCs that have entered the underwriting business. We also find that BHC leverage and variability in returns have significant, positive effects on CEO incentive pay. Finally, we find some evidence supporting the hypothesis that pay for performance sensitivities decline generally at BHCs as return variability increases, as agency theory predicts.
JEL Classification: G21, G30
Suggested Citation: Suggested Citation