Managerial Compensation in the Financial Service Industry

This study provides empirical evidence on executive compensation and bank performance. The objective of this study is to examine the influence director compensation, CEO compensation, chairman’s compensation and CEO ownership on bank performance. This study employed a quantitative and longitudinal research design in which secondary data were collected from the quoted banks in the Nigeria Stock Exchange from 2012 to 2016. Multiple regression technique, descriptive statistic, Pearson correlation matrix, Variance Inflation Factor for multicollinearity and Breusch-Pagan-Godfrey Heteroskedasticity test for heteroskedasticity in the regression results the data analysis are performed using EViews 8.0 econometric software. The empirical results show that director compensation has a negative and insignificant influence on bank performance measured by return on equity, CEO compensation has a positive and a significant influence on bank performance, chairman compensation has a negative and a significant influence on bank performance, CEO ownership has a positive and insignificant influence on bank performance while the control variable, firm size has positive and insignificant influence on bank performance. The study recommended that quoted companies in Nigeria should be more concern of CEO ownership and compensation as it had a negative impact on the performance of the organization. The study recommends that quoted banks in Nigeria should be more concern of chairman’s compensation due to it negative influence on bank performance. The study also suggests that remuneration drive CEO motivation to enhance performance.

Purpose– The purpose of this paper is to investigate the relationship between Chief Executive Officers’ (CEOs) compensation and corporate governance practices of publicly listed companies in New Zealand for the period 2005-2010.Design/methodology/approach– Prior literature argues that corporate governance systems and structures are heterogeneous, that is, corporate governance mechanisms that are important tend to be specific to a country and its institutional structures. The two corporate governance mechanisms most important for monitoring CEO compensation are ownership structure and board structure. The authors use a generalised least squares regression estimation technique to examine the effect ownership structure and board structure has on CEO compensation, and examine whether ownership structure, board structure, CEO and director compensation have an effect on company performance.Findings– After controlling for size, performance, industry and year effects, the authors report that internal features rather than external features of corporate governance practices influence CEO compensation. Companies that have their CEO on the board pay them more than those who do not sit on the board, suggesting CEOs on boards have power to influence board decisions and therefore boards become less effective in monitoring CEO compensation in the New Zealand context. Companies that pay their directors more tend to reward their CEOs more as well, thus supporting the managerial entrenchment hypothesis.Research limitations/implications– The results confirm the findings reported in prior studies that institutional investors are ineffective in monitoring managerial decisions and their focus is on decisions that benefit them on a short-term basis.Practical implications– The findings indicate that although the proportion of independent directors on boards does not significantly influence CEO compensation, it does indicate that outside directors are passive and are no more effective than insiders when it comes to the oversight and supervision of CEO compensation.Originality/value– Being a small and open financial market with many small- and medium-sized listed companies, New Zealand differs from large economies such as the UK and the USA in the sense that CEOs in New Zealand tend to be closely connected to each other. As such, the relationship between pay-performance for New Zealand is found to be different from those reported for the UK and the USA. In New Zealand, the proportion of institutional and/or block shareholders is positively associated with CEO compensation and negatively associated with company performance, suggesting that it is not an effective mechanism for monitoring CEO compensation.

CEO compensation, director compensation, and firm performance: Evidence of cronyism?

Purpose: This study intends to investigate the relationship between bank performance and managerial compensation. The study is in aligned with the prior literature and adds an insight for the baking sector of Pakistan in this direction, Design and Methodology: The study uses return on equity to gauge the bank performance and managerial compensation which includes the bonuses and total salary paid to CEO. For this purpose, a sample of twenty-eight banks for the period of twelve years i.e. 2009 to 2021 has been considered. Panel data estimation models have been employed for the purpose of analysis. Findings: The findings of the study shows a positive relationship between the bank performance and CEO compensation. Our results are aligned with the agency theory and emphasis on market competitive salary for the CEO. Implications: Our study complements the previously available literature that in order to minimize the agency problem, CEO should be paid adequately that impacted banks performance positively.

We model CEO and director compensation using firm characteristics, CEO characteristics, and governance variables. We find that director compensation is related to variables that proxy for the level of monitoring and effort required by directors. After controlling for monitoring proxies, we find a significant positive relation between CEO and director compensations. We hypothesize that this relation could be due to unobserved firm complexity (omitted variables), and/or to excessive compensation of directors and managers. We find that these excessive compensations are associated with firm underperformance. Thus, we conclude that excessive compensation may be associated with an environment of ineffective monitoring, which we term cronyism.

The purpose of this study is to investigate CEO Compensation and Bank Performance: Moderating Role of Bank Size. The study's independent variable is CEO Compensation, moderating variable is Bank Size and the dependent variable is Bank Performance. The study makes use of secondary panel data encompassing ten major commercial banks over a ten-year period from the fiscal year 2014–15 to 2023–24. This study concludes that the positive relationship was not evident in the correlation analysis, where a negative correlation was found between CEO compensation and ROA. The interaction term between CEO compensation and Bank Size was negative and statistically significant. This implies a moderating effect, meaning the positive impact of CEO compensation on ROA diminishes as Bank Size increases. In essence, CEO pay contributes more to performance in smaller Bank's than in larger ones, possibly due to differences in management structure, oversight, or decision-making agility. Keywords: CEO Compensation, Bank Size and Bank Performance

PurposeThe purpose of this paper is to investigate executive compensation in the finance sector during the periods surrounding the crisis with a view to determining whether compensation incentives were associated with excessive risk taking.Design/methodology/approachThe authors compare pay-for-performance sensitivity (PFPS) parameters for the finance sector before, during, and after the financial crisis. The authors also employ the technology sector as a comparison benchmark.FindingsThe authors find that CEO compensation is strongly associated with the accounting-based return on assets performance measure in the finance sector particularly in the pre-crisis period; the relationship is amplified in larger firms. In contrast, the technology sector exhibits PFPS only for the market-based stockholder return measure with smaller firms displaying greater sensitivity.Originality/valueFrom a public policy perspective, it is desirable that PFPS for senior executives in the finance sector is muted. This is due to the risk-shifting incentives specific to the sector whereby profits flow to managers/stockholders while catastrophic losses can be socialized through taxpayer funded bailouts. The findings imply that compensation practices in the finance sector remain a potential concern for systemic stability. In addition to academics and practitioners, the paper may be of interest to financial regulators. In the authors opinion they should consider monitoring PFPS in addition to capital ratios, credit default swap spreads, and other metrics in their risk containment strategies.

This study investigates the cronyism evidence in Indian listed firms and examines if excessive CEO and directors compensation reflect pay reciprocity impacting firm performance. Further the impact of CEO’s ties with the controlling owner on excess compensation, pay reciprocity and cronyism is also examined. OLS fixed effects regression on NSE 500 firms during 2002–2020 has been used for investigating the evidence of cronyism and the impact of CEOs’ ties with the controlling owner on cronyism. Based on the analysis it is observed that CEO compensation is strongly linked to CEO characteristics and corporate governance in addition to economic determinants. Consistent with reciprocity norms, we report a positive relationship between excess CEO compensation and excess director compensation, especially in firms where the CEO has ties to the controlling owner. However, pay reciprocity does benefit shareholders by improving subsequent firm value. Our findings indicate that excess CEO compensation increases subsequent firm value, especially in firms where the CEO has ties to the controlling owner.

PurposeThis paper examines the effect of restrictions on executive pay and high CEOs’ compensation on bank performance following the “2008 UK bank rescue policy”.Design/methodology/approachUsing the difference-in-difference estimation technique we assess the relationship between executive compensation and financial performance of rescued banks relative to non-rescued banks over the period 1999–2019.FindingsOur main finding indicates that the relationship between executive compensation and financial performance declines in rescued banks relative to non-rescued banks. Further, we document that performance continues to deteriorate in rescued banks relative to non-rescued banks. Our results are robust to different estimation techniques.Originality/valueThis study contributes to the literature that examines the efficacy of government bailouts during the 2008 crisis. To the best of the author’s knowledge, this study is among the first to examine the long-term implications of bank rescue and pay restrictions on executive compensation and performance post–rescue.

PurposeThis study investigates the empirical association between environmental, social and corporate governance (ESG) performance and top executive compensation in the US financial services industry. Considering that financial firms can inflict systemic shocks across the economy, it has been argued that they must conduct ethical and sustainable business in accordance with ESG principles. This study examines whether ESG efforts are beneficial to managers.Design/methodology/approachThe authors use CEO compensation and ESG performance ratings data for all US financial firms (SIC 6000–6799) from 2015 to 2019. Employing fixed effects regressions, the authors test whether lagged ESG performance is related to CEO compensation, after controlling for other firm characteristics such as size, financial performance, leverage and CEO stock ownership.FindingsThe authors find that lagged ESG ratings are strongly associated with all forms of compensation. An increase of one standard deviation in the composite ESG rating is associated with a 14%–16% increase in the total pay. Among the three ESG pillars, only S (social) and G (governance) exhibit persistent and significant associations with both short- and long-term executive pay. The authors also document the significant moderating effects of ESG on the relationships among firm performance, size, leverage, ownership and executive pay, identifying how ESG is associated with compensation.Originality/valueThe authors conclude that managers receive ESG incentives implicitly and explicitly. The novel finding of direct and indirect associations between ESG and top executive compensation contributes to the growing ESG literature on the financial sector and ongoing debate about the explicit inclusion of ESG targets in compensation design.

PurposeThe authors extend research suggesting that external funders reduce their contributions to not-for-profit (NFP) organizations in response to media-reported CEO compensation levels.Design/methodology/approachEmploying a maximum archival sample of 44,807 observations from US Form 990s, the authors comprehensively assess the extent that high relative NFP CEO compensation is associated with decreases in future contributions.FindingsThe authors find that donors and grantors react negatively to high relative CEO compensation but do not react adversely to high absolute executive compensation. Contributors seem to take issue with CEO compensation when they perceive it absorbs a relatively large portion of the organizations’ total expenses, which may hinder the NFP’s mission. Additional findings suggest that excess cash held by the NFP significantly exacerbates the negative baseline relationship between future contributions and high relative CEO compensation. Finally, both individual donors and professional grantors are sensitive to cash NFP CEO compensation levels, but grantors are more sensitive to CEO noncash compensation.Research limitations/implicationsThe authors’ data are focused on larger NFP organizations, so this limits the generalizability of the study. Furthermore, survivorship bias potentially influences their time-series investigations because a current year large-scale decrease in funding due to high relative CEO compensation may cause some NFP firms to drop out of the sample the following year due to significant funding reductions.Originality/valueThe study makes three noteworthy contributions to the literature. First, the study documents that the negative association between high relative CEO compensation levels and future donor and grantor contributions is much more widespread than previous literature suggested. Second, the authors document that high relative CEO compensation levels that trigger reductions in future contributions are significantly exacerbated by excess cash held by the NFP. Finally, the authors find that more sophisticated grantors are more sensitive to noncash CEO compensation levels as compared with donors.

Manuscript TypeEmpiricalResearch Question/IssueThis study examines the relationship between bank CEO compensation and mortgage origination practices before the 2008 financial crisis. It extends the discussion about the degree of responsibility of executive compensation for the crisis, by testing whether bank CEO equity incentives contributed to the growth in high‐risk mortgages before the collapse of the mortgage market.Research Findings/InsightsUsing a unique dataset of comprehensive loan origination records and CEO compensation in an inclusive sample of publicly traded U.S. banks, this study finds strong evidence that CEO compensation vega is positively associated with the riskiness of mortgages before the collapse of the mortgage market and some evidence that compensation delta is negatively associated with the riskiness of mortgages.Theoretical/Academic ImplicationsThis study contributes to the understanding of the role of executive compensation in the 2008 financial crisis. Consistent with prior research, it provides further empirical support that compensation vega induces risk‐taking. Moreover, in the context of the financial industry, the findings illustrate the potential adverse effect of high‐vega compensation of bank CEOs, as such compensation may have contributed to the build‐up of high‐risk mortgages prior to the crisis.Practitioner/Policy ImplicationsFollowing the financial crisis, a series of policy changes towards regulating and reforming executive compensation in financial firms has been implemented. This study offers important insights for the reform and design of executive compensation in the financial sector. In particular, practitioners and policymakers should examine the incentive structures of bank executives (such as compensation delta and vega) in order to appropriately influence risk‐taking.

ABSTRACTThis study examines how the background of foreign directors (FDs) influences executive and director compensation. We find that civil law FDs are linked to increased CEO cash compensation while common law FDs are associated with higher equity‐based CEO pay, reflecting a stronger emphasis on shareholder alignment. These patterns are also evident when considering the economic freedoms and the cultural individualism of the directors’ country of origin. Specifically, boards with higher average institutional quality and individualism are linked to more equity‐based CEO compensation. In addition, FDs serving on compensation committees that originate from common law systems, economically free countries, and highly individualistic cultures are more likely to structure both CEO and director pay in ways that align with shareholder interests. Overall, our findings suggest that the institutional, legal, and cultural backgrounds of FDs play a key role in shaping CEO and director pay structures.

Company performance as an achievement of finished tasks illustrates the companys financial condition, which can be analyzed by financial analysis tools. This study aimed to determine the impact of CEO compensation and audit opinion going concern on the performance of banks listed on the BEI from 2014 to 2019, as well as to evaluate the performance using the Data Envelopment Analysis (DEA) tool. Furthermore, this study also aimed to examine the effect of audit opinion going concern, which was determined as the moderation variable to the relationship between the CEOs compensation and banking performance. The study used a quantitative type. Subjects examined were banks listed in BEI and reported their financial statements consistently from 2014 to 2019. The data analysis was using Partial Least Square (PLS). Based on the study results, it is discovered that CEOs compensation positively and significantly affected banking performance on the studied year, audit opinion going concern significantly affected banking performance, and the audit opinion going concern that determined as the moderation variable could not strengthen or weaken the relationship between CEOs compensation and banking performance.

The US financial crisis of 2008 and subsequent Global Financial Crisis were considered by many economists the worst financial crisis since the Great Depression of the 1930s. As a results, Dodd-Frank Act has passed and aims “(1) to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail", (2) to protect the American taxpayer by ending bailouts, (3) to protect consumers from abusive financial services practices, and for other purposes.” The enactment of Dodd-Frank Act, in part, intended to significantly influence accountability on executive compensation especially for the financial institutions. This paper empirically investigates the changes in Financial CEOs’ compensation since the Financial Crisis of 2008. Our findings show that in the post- Financial Crisis period financial leverage is significant factor influencing the CEOs’ total compensation. In addition market based performance such as stock price and market-to-book ratio shows significant positive relationship with CEO compensation. This change can be interpreted an attempt to reduce opportunistic behavior of top executives after the financial crisis and the enactment of the Dodd-Frank Act.