Deferred cash compensation and risk-taking: Evidence from the Chinese banking industry

Abstract

Starting in 2010, the China Banking Regulatory Commission (CBRC) mandated that between 40% and 50% of the annual variable compensation of senior commercial bank managers be paid over the subsequent 3 years or longer. We examine the implications of the CBRC deferred compensation regulation for bank risk-taking using a sample of 156 bank executives from 14 listed Chinese commercial banks. We find that before the 2010 regulation, high-risk banks deferred executive compensation less than low-risk banks. We also find that banks reduced their risk-taking after the 2010 regulation, and the reduction was greater for banks with higher pre-regulation risk. Unlike prior research which examines equity compensation, we provide evidence on the use of deferred executive cash compensation and its implications for bank risk-taking in an emerging market.