Incentive Compensation for Bank Directors: The Impact of Deregulation

Weinberg Center for Corporate Governance Working Paper No. 2003-2

37 Pages Posted: 11 Sep 2003

See all articles by David Becher

David Becher

Drexel University

Melissa B. Frye

University of Central Florida - College of Business Administration

Terry L. Campbell

University of Delaware - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 17, 2003

Abstract

Although industry deregulation leads to changes in the scale and scope of the duties of the board of directors, little is known about the changes in incentives for directors surrounding such events. The deregulation of the U.S. banking industry and associated technological and regulatory changes during the 1990s lends itself to a natural experiment. These industry shocks forced bank boards of directors to face expanded opportunity sets, increased competition, and a rapidly expanding market for corporate control. While bank directors receive significantly less equity-based compensation throughout most of our sample period, by the end of the decade their use of equity-based compensation is indistinguishable from a matched sample of industrial firms. Moreover, banks utilizing a high degree equity-based compensation for directors are associated with higher performance and higher growth without a similar increase in risk. The increase in the use of equity-based compensation for bank directors is not due to a fundamental shift in bank boards, as board size and independence have remained static. Overall, our results suggest that firms respond to deregulation by improving internal monitoring through aligning directors' incentives with those of shareholders.

Keywords: Boards of Directors, Director Compensation, Equity-based Compensation, Banking, Deregulation

JEL Classification: G30, G34, G21

Suggested Citation

Becher, David and Frye, Melissa and Campbell, Terry Lee, Incentive Compensation for Bank Directors: The Impact of Deregulation (July 17, 2003). Weinberg Center for Corporate Governance Working Paper No. 2003-2. Available at SSRN: https://ssrn.com/abstract=425441 or http://dx.doi.org/10.2139/ssrn.425441

David Becher

Drexel University ( email )

3220 Market Street
1127 Gerri C LeBow Hall
Philadelphia, PA 19104
United States
215-895-2274 (Phone)
215-895-2295 (Fax)

Melissa Frye (Contact Author)

University of Central Florida - College of Business Administration ( email )

P.O. Box 161400
Department of Finance
Orlando, FL 32816
United States
407-823-3097 (Phone)

Terry Lee Campbell

University of Delaware - Department of Finance ( email )

College of Business and Economics
Newark, DE 19716
United States

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