Pay Gap Within Banks: The Effect On Bank Performance

46 Pages Posted: 2 Jan 2019 Last revised: 9 Aug 2019

See all articles by Justin Chircop

Justin Chircop

Lancaster University Management School

Lars Helge Hass

Lancaster University - Management School; University of Iowa - Henry B. Tippie College of Business

Paul Hribar

University of Iowa - Henry B. Tippie College of Business

Date Written: June 30, 2019

Abstract

Using a comprehensive sample of US banks for years 2001 to 2016, we split the pay gap between the CEO and rank-and-file employees into two: CEO pay gap and VP pay gap. We examine the effect on bank performance of the tournament incentives arising from these different pay gaps. We find that CEO pay gap is positively associated with bank performance and negatively associated with bank risk while VP pay gap is positively associated with bank risk. We show that only executive pay is sensitive to bank performance, which might explain the differing results for the association between pay gap and bank performance for the two groups. Further analysis suggests that the positive association between VP pay gap and bank risk is at least partly driven by the quantity and quality of loan origination. Finally, we show that the VP pay gap is associated with insufficient loan loss provisions consistent with increased unexpected rank-and-file employee risk taking.

Keywords: Tournament Incentives, Managerial Talent, Firm Risk, Firm Return, Corporate Policies

JEL Classification: G31, G32, G34, J31, J33, L14

Suggested Citation

Chircop, Justin and Hass, Lars Helge and Hribar, Paul, Pay Gap Within Banks: The Effect On Bank Performance (June 30, 2019). Available at SSRN: https://ssrn.com/abstract=3295036 or http://dx.doi.org/10.2139/ssrn.3295036

Justin Chircop (Contact Author)

Lancaster University Management School ( email )

Lancaster University
Lancaster, Lancashire LA1 4YX
United Kingdom

Lars Helge Hass

Lancaster University - Management School ( email )

Department of Accounting and Finance
Lancaster, LA1 4YX
United Kingdom

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States

Paul Hribar

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States
319-335-1008 (Phone)

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