Looking beyond the CEO: Executive Compensation at Banks

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Looking beyond the CEO: Executive Compensation at Banks

March 1999 Number 68

JEL classification: G21, G30, J33

Authors: Rebecca S. Demsetz and Marc R Saidenberg

The literature on executive compensation at banks has proceeded largely under the assumption that a single elasticity can adequately describe the sensitivity of executive pay to firm performance, but theories of performance based pay and tournament pay suggest that this assumption may be incorrect. We test the single-elasticity assumption by comparing the components of compensation and the pay-performance relationship across banks with different characteristics and bank executives of different positions. We find that the structure of compensation varies significantly across firms, with firm size being an important explanatory firm characteristic. The structure of compensation also varies across executive positions, but only after controlling for differences across firms. These patterns translate into significant differences in pay-performance relationships across firms, with size being the distinguishing firm characteristic. Differences across executives are less robust. There is some evidence that CEO stature enhances pay-performance sensitivity at the largest banks in our sample, but the non-base pay components of CEO compensation are apparently less performance sensitive than their labels would suggest.

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