Abstract
This study examines the effect of compensation restrictions introduced by the Troubled Assets Relief Program (TARP) of 2008 on the performance of banks and their compensation structures. It documents significant performance improvement among TARP banks that experienced Chief Executive Officer (CEO) resignations after their banks accepted TARP funds. The improvement is most significant in the year following CEO resignation. In addition, TARP banks that kept their CEOs show a significant increase in CEO pensions post-TARP. TARP banks that did not experience CEO resignations, thus, appear to substitute pension increases for their CEOs to mitigate the TARP-induced decrease in conventional forms of compensation. Further analysis on all banks without CEO resignations shows that TARP banks have significantly higher increase in pension benefits post 2009 than banks that chose to decline TARP funds. The evidence shows that increased pension arrangements play a significant role in CEOs’ decisions to remain in their roles despite the constraints imposed by TARP.
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