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Looking beyond the CEO: executive compensation at banks

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  • Rebecca S. Demsetz
  • Marc R. Saidenberg
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    Abstract

    The literature on executive compensation at banks has proceeded largely under the assumption that a single elasticity can adequately describe the sensitivity of executive pay to firm performance, but theories of performance based pay and tournament pay suggest that this assumption may be incorrect. We test the single-elasticity assumption by comparing the components of compensation and the pay-performance relationship across banks with different characteristics and bank executives of different positions. We find that the structure of compensation varies significantly across firms, with firm size being an important explanatory firm characteristic. The structure of compensation also varies across executive positions, but only after controlling for differences across firms. These patterns translate into significant differences in pay-performance relationships across firms, with size being the distinguishing firm characteristic. Differences across executives are less robust. There is some evidence that CEO stature enhances pay-performance sensitivity at the largest banks in our sample, but the non-base pay components of CEO compensation are apparently less performance sensitive than their labels would suggest.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 68.

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    Date of creation: 1999
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    Handle: RePEc:fip:fednsr:68

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    Related research

    Keywords: Wages ; Bank employees ; Bank directors ; Bank size ; Bank profits;

    References

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    1. Kevin J. Murphy, 1986. "Incentives, Learning, and Compensation: A Theoretical and Empirical Investigation of Managerial Labor Contracts," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 59-76, Spring.
    2. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April.
    3. Murphy, K.J. & Gibbons, R., 1990. "Optimal Incentive Contracts in the Presence of Career Concerns : Theory and Evidence," Papers 90-09, Rochester, Business - Managerial Economics Research Center.
    4. Donald P. Morgan, 1998. "Judging the risk of banks: what makes banks opaque?," Research Paper 9805, Federal Reserve Bank of New York.
    5. Hubbard, R. Glenn & Palia, Darius, 1995. "Executive pay and performance Evidence from the U.S. banking industry," Journal of Financial Economics, Elsevier, vol. 39(1), pages 105-130, September.
    6. Houston, Joel F. & James, Christopher, 1995. "CEO compensation and bank risk Is compensation in banking structured to promote risk taking?," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 405-431, November.
    7. Crawford, Anthony J & Ezzell, John R & Miles, James A, 1995. "Bank CEO Pay-Performance Relations and the Effects of Deregulation," The Journal of Business, University of Chicago Press, vol. 68(2), pages 231-56, April.
    8. Gibbons, R. & Murphy, K.J., 1989. "Relative Performance Evaluation For Chief Executive Officers," Working papers 532, Massachusetts Institute of Technology (MIT), Department of Economics.
    9. Scott Schaefer, 1998. "The Dependence Of Pay--Performance Sensitivity On The Size Of The Firm," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 436-443, August.
    10. Barro, Jason R. & Barro, Robert J., 1990. "Pay, Performance, and Turnover of Bank CEOs," Scholarly Articles 3451300, Harvard University Department of Economics.
    11. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
    12. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
    13. Garen, John E, 1994. "Executive Compensation and Principal-Agent Theory," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1175-99, December.
    14. Murphy, Kevin J., 2000. "Performance standards in incentive contracts," Journal of Accounting and Economics, Elsevier, vol. 30(3), pages 245-278, December.
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    Cited by:
    1. Timothy King & Jonathan Williams, 2013. "Bank Efficiency and Executive Compensation," Working Papers 13009, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    2. Gianni De Nicolo, 2000. "Size, charter value and risk in banking: an international perspective," International Finance Discussion Papers 689, Board of Governors of the Federal Reserve System (U.S.).

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