Abstract
The rise in the level of executive compensation in international banking in the last two decades has been striking. At the same time, corporate declarations of relative performance evaluation (RPE) have enjoyed widespread popularity. RPE determines the level of CEO pay by accounting for common market shocks that are out of a CEO’s control, providing better governance and incentivizing CEOs to maximize shareholder value. In this paper, we test for evidence of RPE in international banking and pay particular attention to banks that openly disclose its use. To that end, we collect compensation data on 46 large international banks. Taken as a whole, our sample shows moderate evidence consistent with RPE. We report stronger evidence once we investigate the subsample of RPE-disclosing banks. These results hold up to a series of robustness checks. In addition, we find that the use of RPE is positively related to firm size and negatively related to growth options.
Highlights
The rise in the level of executive compensation in international banking in the last two decades has been striking
5.3 Robustness checks we conduct three different checks to gauge the robustness of the results obtained in the “Results” section: (1) we construct regional instead of global peer groups, (2) we construct value-weighted instead of equalweighted peer groups, and (3) we examine the effect of excluding the years of the financial crisis (2007 and 2008)
6 Conclusion This papers tests the presence of relative performance evaluation (RPE) in an original sample of 46 international banks from 2004 to 2013
Summary
The rise in the level of executive compensation in international banking in the last two decades has been striking. RPE implies that compensation contracts should be linked to firm performance in relation to peers with similar characteristics. Our results withstand several robustness tests and suggest that the banks in our sample which proclaim the use of peers in assessing the performance of their CEOs are not merely window dressing: we do find stronger evidence for RPE usage among disclosing banks. This indicates that lumping together disclosing and non-disclosing firms can be detrimental to the conclusiveness of RPE tests.
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