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Executive Pay and Performance: Evidence from the U.S. Banking Industry

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  • R. Glenn Hubbard
  • Darius Palia

Abstract

This paper examines an effect of deregulating the market for corporate control on CEO compensation in the banking industry. Given that each state's banking regulation defines the competitiveness of its corporate control market, we examine the effect of a state's interstate banking regulation on the level and structure of bank CEO compensation. Using panel data on 147 banks over the decade of the 1980s, we find evidence supporting the hypothesis that competitive corporate control markets (i.e., where interstate banking is permitted) require talented managers whose levels of compensation are higher. We also find that the compensation-performance relationship is stronger than for managers in markets where interstate banking is not permitted. Further, CEO turnover increases substantially after deregulation, as does the proportion in performance-related compensation. These results suggest strong evidence of a managerial talent market -- that is, one which matches the level and structure of compensation with the competitiveness of the banking environment.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4704.

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Date of creation: Apr 1994
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Publication status: published as Journal of Financial Economics, vol. 39, (1995). pp. 105-130
Handle: RePEc:nbr:nberwo:4704

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