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Financial crisis and executive remuneration in banking industry - an analysis of five British banks

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  • Jean Jinghan Chen
  • Haitao Zhang
  • Xinrong Xiao
  • Weian Li

Abstract

The recent financial crisis has accelerated the debate of executive remuneration. Theoretically, there are divergences between the design of executive remuneration suggested by agency theory and reality. In this study, we contribute to this debate by re-visiting the theories underlying the design of executive remuneration and providing empirical evidence from the recently banking failures in the UK. Empirically, we find that ineffective executive remuneration could contribute significantly to business failure. The lavish executive remuneration packages of the five troubled British banks do not reflect the companies' performances and provide little reward to the shareholders. Theoretically, we find that the executive remuneration design derived from a single agency perspective is insufficient to provide convincing explanation to the real business world during the financial crisis. Prospect theory, real option theory and the managerial power approach all together would complement agency theory to bring the theory of executive remuneration closer to reality. Our extended theoretical framework sheds some lights on the factors that undermine the executive remuneration that a single agency theory does not take into account, and thus have valuable policy implications for improving executive remuneration design in the future.

Suggested Citation

  • Jean Jinghan Chen & Haitao Zhang & Xinrong Xiao & Weian Li, 2011. "Financial crisis and executive remuneration in banking industry - an analysis of five British banks," Applied Financial Economics, Taylor & Francis Journals, vol. 21(23), pages 1779-1791.
  • Handle: RePEc:taf:apfiec:v:21:y:2011:i:23:p:1779-1791
    DOI: 10.1080/09603107.2011.587769
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    Cited by:

    1. Patrick Payne & Tammy Huffman Ph.D, 2012. "Minimizing predatory lending: Designing a long-term compensation structure to minimize the actions of opportunistic mortgage brokers," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 2(5), pages 8-19, October.
    2. repec:eee:riibaf:v:42:y:2017:i:c:p:1489-1503 is not listed on IDEAS

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