Antecedents and Consequences of Executive Pay Dispersion in the U.S. Banking Industry

Abstract

There has been an increasing debate on the issue of pay inequality due to the recent financial crisis. Over the last few decades, the issues of executive pay dispersion and its performance implication have been a key research topic. However, previous studies have paid little attention to the role of compensation committee regarding executive pay dispersion. Social comparison theory and institutional theory suggest that committee members on corporate board show mimetic behaviors when making decisions on executive pay structure. Specifically, we propose that compensation committees are likely to create similar level of pay dispersion for focal firm (i.e. where committee member as serve directors) that mirrors the pay dispersion of tied firm (i.e. where committee member serve as managers). We also propose that the executive pay dispersion before financial crisis had negative performance implications. Using a sample of U.S. banks, we found that the pay dispersion level of tied firms is positively associated w...