Executive compensation in the commercial banking industry: An examination of industry-specific influences on CEO pay

摘要

It is generally argued that compensation structure, in particular Performance-based pay, is one way of mitigating agency problems. It is also generally acknowledged that agency problems are greatest where managerial discretion and the firm's investment opportunity set is largest. Previous studies have examined compensation structure for large cross-sections of firms from a wide cross-section of industries. Such studies ignore important firm and industry specific influences on pay structure. By examining the commercial banking industry in isolation this thesis controls for industry influences. One such influence is regulation. Regulation reduces managerial discretion, investment opportunities, and agency costs. The significant bank deregulation of the early 1980's, in turn, increased managerial discretion and the agency costs associated with such discretion. This thesis examines how bank CEO pay structure changed with deregulation. Consistent with agency theory, evidence is provided that the pay-performance relation for bank CEOs increased after deregulation. Increases in the pay-performance relation are reported for all compensation variables examined: salary and bonus, total pay, CEO pay-related wealth, stock option wealth, and inside stock holdings.;Performance variables in performance-based pay schemes are almost always influenced by random factors beyond CEO control. Therefore, performance based pay schemes increase compensation risk to CEOs. Risk averse CEOs will require higher levels expected compensation for assuming greater risk. By tying compensation to performance relative to peer group performance, compensation risk and compensation costs can be reduced. This thesis provides evidence that bank CEO pay is adjusted for industry performance. Consistent with agency theory the use of relative performance evaluation increased after deregulation, concurrently with increased pay-performance relations. In short, this thesis provides evidence that compensation structure in the commercial banking industry is constructed to mitigate agency costs in a manner consistent with agency theory.