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Regulation, subordinated debt, and incentive features of CEO compensation in the banking industry

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  • Kose John
  • Hamid Mehran
  • Yiming Qian

Abstract

We study CEO compensation in the banking industry by considering banks’ unique claim structure in the presence of two types of agency problems: the standard managerial agency problem and the risk-shifting problem between shareholders and debtholders. We empirically test two hypotheses derived from this framework: that the pay-for-performance sensitivity of bank CEO compensation (1) decreases with the total leverage ratio and (2) increases with the intensity of monitoring provided by regulators and nondepository (subordinated) debtholders. We construct an index of the intensity of outsider monitoring based on four variables: the subordinated debt ratio, subordinated debt rating, nonperforming loan ratio, and BOPEC rating (regulators’ assessment of a bank’s overall health and financial condition). We find supporting evidence for both hypotheses. Our results hold after controlling for the endogeneity among compensation, leverage, and monitoring; they are robust to various regression specifications and sample criteria.

Suggested Citation

  • Kose John & Hamid Mehran & Yiming Qian, 2007. "Regulation, subordinated debt, and incentive features of CEO compensation in the banking industry," Staff Reports 308, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:308
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    References listed on IDEAS

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    Cited by:

    1. Elizabeth W. Cooper, 2011. "Determinants of off-balance sheet usage in private banks," Studies in Economics and Finance, Emerald Group Publishing, vol. 28(4), pages 248-259, October.
    2. Qian, Yiming & John, Kose & John, Teresa A., 2004. "Financial system design and liquidity provision by banks and markets in a dynamic economy," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 385-403, April.
    3. Nedelchev, Miroslav, 2010. "Корпоративно Управление На Финансови Групи (Спазвай И Обяснявай)
      [Corporate Governance of Financial Groups (Comply and Explain)]
      ," MPRA Paper 52249, University Library of Munich, Germany.
    4. Ortiz-Molina, Hernan, 2007. "Executive compensation and capital structure: The effects of convertible debt and straight debt on CEO pay," Journal of Accounting and Economics, Elsevier, vol. 43(1), pages 69-93, March.
    5. Gregory Sierra & Eli Talmor & James Wallace, 2006. "An Examination of Multiple Governance Forces within Bank Holding Companies," Journal of Financial Services Research, Springer;Western Finance Association, vol. 29(2), pages 105-123, April.
    6. Elizabeth Webb, 2008. "Regulator Scrutiny and Bank CEO Incentives," Journal of Financial Services Research, Springer;Western Finance Association, vol. 33(1), pages 5-20, February.

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    Keywords

    Bank directors ; Chief executive officers ; Banks and banking - Ratio analysis ; Bank supervision ; Wages;

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