IDEAS home Printed from https://ideas.repec.org/p/fip/fednsr/68.html
   My bibliography  Save this paper

Looking beyond the CEO: executive compensation at banks

Author

Listed:
  • Rebecca Demsetz
  • Marc R. Saidenberg

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.

Suggested Citation

  • Rebecca Demsetz & Marc R. Saidenberg, 1999. "Looking beyond the CEO: executive compensation at banks," Staff Reports 68, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:68
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr68.html
    Download Restriction: no
    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr68.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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 841-864, October.
    2. Barro, Jason R & Barro, Robert J, 1990. "Pay, Performance, and Turnover of Bank CEOs," Journal of Labor Economics, University of Chicago Press, vol. 8(4), pages 448-481, October.
    3. 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.
    4. Robert Gibbons & Kevin J. Murphy, 1990. "Relative Performance Evaluation for Chief Executive Officers," ILR Review, Cornell University, ILR School, vol. 43(3), pages 30, April.
    5. Murphy, Kevin J., 2000. "Performance standards in incentive contracts," Journal of Accounting and Economics, Elsevier, vol. 30(3), pages 245-278, December.
    6. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 468-505, June.
    7. 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.
    8. 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.
    9. 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 231-256, April.
    10. 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.
    11. 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 225-264, April.
    12. 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.
    13. Donald P. Morgan, 1998. "Judging the risk of banks: what makes banks opaque?," Research Paper 9805, Federal Reserve Bank of New York.
    14. Garen, John E, 1994. "Executive Compensation and Principal-Agent Theory," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1175-1199, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lin Guo & Abu Jalal & Shahriar Khaksari, 2015. "Bank executive compensation structure, risk taking and the financial crisis," Review of Quantitative Finance and Accounting, Springer, vol. 45(3), pages 609-639, October.
    2. Timothy King & Jonathan Williams, 2013. "Bank Efficiency and Executive Compensation," Working Papers 13009, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    3. Song, Keke & Wang, Jun, 2023. "When banks become shareholder activists," Journal of Banking & Finance, Elsevier, vol. 153(C).
    4. 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.).
    5. Agata Wieczorek, 2016. "Determinanty wynagrodzeń członków rad nadzorczych w bankach notowanych na Giełdzie Papierów Wartościowych w Warszawie," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 6, pages 43-68.
    6. Agata Wieczorek, 2022. "The transparency of remuneration policy in financial holding companies based on the example of the UniCredit Group," Journal of Banking Regulation, Palgrave Macmillan, vol. 23(2), pages 173-198, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ang, James & Lauterbach, Beni & Schreiber, Ben Z., 2002. "Pay at the executive suite: How do US banks compensate their top management teams?," Journal of Banking & Finance, Elsevier, vol. 26(6), pages 1143-1163, June.
    2. repec:eee:labchp:v:3:y:1999:i:pb:p:2485-2563 is not listed on IDEAS
    3. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 75-102, December.
    4. Gregory E. Sierra & Eli Talmor & James S. Wallace, 2004. "A unified analysis of executive pay: the case of the banking industry," Supervisory Policy Analysis Working Papers 2004-02, Federal Reserve Bank of St. Louis.
    5. Matousek, Roman & Tzeremes, Nickolaos G., 2016. "CEO compensation and bank efficiency: An application of conditional nonparametric frontiers," European Journal of Operational Research, Elsevier, vol. 251(1), pages 264-273.
    6. Fahlenbrach, Rüdiger & Stulz, René M., 2011. "Bank CEO incentives and the credit crisis," Journal of Financial Economics, Elsevier, vol. 99(1), pages 11-26, January.
    7. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    8. Ili, Dragan & Pisarov, Sonja & Schmidt, Peter S., 2015. "Preaching Water But Drinking Wine? Relative Performance Evaluation in International Banking," Working papers 2015/10, Faculty of Business and Economics - University of Basel.
    9. Canice Prendergast, 1996. "What Happens Within Firms? A Survey of Empirical Evidence on Compensation Policies," NBER Working Papers 5802, National Bureau of Economic Research, Inc.
    10. Dragan Ilić & Sonja Pisarov & Peter S. Schmidt, 2015. "Preaching water but drinking wine? Relative performance evaluation in international banking," ECON - Working Papers 208, Department of Economics - University of Zurich, revised Aug 2016.
    11. Dragan Ilić & Sonja Pisarov & Peter S. Schmidt, 2019. "Preaching water but drinking wine? Relative performance evaluation in international banking," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 155(1), pages 1-25, December.
    12. Marianne Bertrand & Sendhil Mullainathan, 2000. "Do CEOs Set Their Own Pay? The Ones Without Principals Do," NBER Working Papers 7604, National Bureau of Economic Research, Inc.
    13. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    14. Canice Prendergast, 2000. "The Tenuous Tradeoff Between Risk and Incentives," NBER Working Papers 7815, National Bureau of Economic Research, Inc.
    15. Zhiguo He & Si Li & Bin Wei & Jianfeng Yu, 2014. "Uncertainty, Risk, and Incentives: Theory and Evidence," Management Science, INFORMS, vol. 60(1), pages 206-226, January.
    16. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    17. James, Hui & Benson, Bradley W. & Wu, Chen (Ken), 2017. "Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 328-345.
    18. Brunello, Giorgio & Graziano, Clara & Parigi, Bruno, 2001. "Executive compensation and firm performance in Italy," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 133-161, January.
    19. Anderson, Christopher W. & Becher, David A. & Campbell, Terry II, 2004. "Bank mergers, the market for bank CEOs, and managerial incentives," Journal of Financial Intermediation, Elsevier, vol. 13(1), pages 6-27, January.
    20. Renneboog, L.D.R. & Trojanowski, G., 2002. "The Managerial Labor Market and the Governance Role of Shareholder Control Structures in the UK," Discussion Paper 2002-68, Tilburg University, Center for Economic Research.
    21. Fredrik Andersson & Matthew Freedman & John Haltiwanger & Julia Lane & Kathryn Shaw, 2009. "Reaching for the Stars: Who Pays for Talent in Innovative Industries?," Economic Journal, Royal Economic Society, vol. 119(538), pages 308-332, June.
    22. Paul L. Joskow & Nancy L. Rose, 1994. "CEO Pay and Firm Performance: Dynamics, Asymmetries, and Alternative Performance Measures," NBER Working Papers 4976, National Bureau of Economic Research, Inc.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:68. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gabriella Bucciarelli (email available below). General contact details of provider: https://edirc.repec.org/data/frbnyus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.