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
Date Written: July 17, 2003
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: Suggested Citation