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Cash Salary, Inside Equity, or Inside Debt?—The Determinants and Optimal Value of Compensation Structure in a Long-term Incentive Model of Banks

Author

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  • Tianyi Ma

    (School of Management, Harbin Institute of Technology, Harbin City 150000, China)

  • Minghui Jiang

    (School of Management, Harbin Institute of Technology, Harbin City 150000, China)

  • Xuchuan Yuan

    (School of Business, Singapore University of Social Sciences, Singapore 599494, Singapore)

Abstract

The design and optimization of executive compensation structure to reduce the risk-taking of banks is one of the core topics of corporate governance theory. Especially after the 2008 global financial crisis, due to the characteristics of banks, such as systemic risk, this issue has become more important. However, though widely concerned, the determinants and design principles of compensation are not thoroughly understood. Based on our previous work, the setup of a banker’s long-term total compensation model, we continue our research by setting up a theoretical model between total compensation, bank default risk, and the structure coefficient by simulating the result using data from Wells Fargo and Co. to draw the function image. We are the first to find out the determinants of structure, that is, the working time, current age, and tenure. What is more important is that we find that increasing the weight inside debt in the total compensation is not only helpful for the reduction of the bank’s default risk, but also an increase of the banker’s total compensation. We also illustrate the influence of a number of periods. We expect our findings to offer help regarding the formulation of policies for pay contracts.

Suggested Citation

  • Tianyi Ma & Minghui Jiang & Xuchuan Yuan, 2020. "Cash Salary, Inside Equity, or Inside Debt?—The Determinants and Optimal Value of Compensation Structure in a Long-term Incentive Model of Banks," Sustainability, MDPI, vol. 12(2), pages 1-24, January.
    • Handle: RePEc:gam:jsusta:v:12:y:2020:i:2:p:666-:d:309547
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    References listed on IDEAS

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    1. Tianyi Ma & Minghui Jiang & Xuchuan Yuan, 2020. "Optimize the Banker’s Multi-Stage Decision-Making and the Mechanism of Pay Contract Influencing on Bank Default Risk in the Long-Term Model," Sustainability, MDPI, vol. 12(4), pages 1-22, February.

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