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Pay, Performance, and Turnover of Bank CEOs

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  • Jason R. Barro
  • Robert J. Barro

Abstract

We studied the relation of CEO pay and turnover to performance and characteristics of companies in a new data set that covers large commercial banks over the period 1982-87. For newly hired CEOs, the elasticity of pay with respect to assets is about one-third. As experience increases, the correlation between compensation and assets diminishes for about four years and then rises back to its initial value. We interpret these findings along the lines of Rosen's matching model, allowing for adjustments of compensation and bank assets and for possible dismissal of the CEO. For continuing CEOs, the change in compensation depends on performance as measured by stock and accounting returns. The sensitivity of pay to performance diminishes with experience, and there is no indication that stock or accounting returns are filtered for aggregate returns. Logit regressions relate the probability of CEO departure to age and performance. The relevant measure of performance in this context is stock returns filtered for average returns of banks in the same year and geographical region.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3262.

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Date of creation: Feb 1990
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Publication status: published as Journal of Labor Economics, Vol. 8, no. 4 (October 1990): 448-481.
Handle: RePEc:nbr:nberwo:3262

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  1. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
  2. Ciscel, David H & Carroll, Thomas M, 1980. "The Determinants of Executive Salaries: An Econometric Survey," The Review of Economics and Statistics, MIT Press, vol. 62(1), pages 7-13, February.
  3. Murphy, Kevin J., 1985. "Corporate performance and managerial remuneration : An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 11-42, April.
  4. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
  5. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
  6. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-84, December.
  7. Michael Keren & David Levhari, 1983. "The Internal Organization of the Firm and the Shape of Average Costs," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 474-486, Autumn.
  8. Coughlan, Anne T. & Schmidt, Ronald M., 1985. "Executive compensation, management turnover, and firm performance : An empirical investigation," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 43-66, April.
  9. Warner, Jerold B. & Watts, Ross L. & Wruck, Karen H., 1988. "Stock prices and top management changes," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 461-492, January.
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