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Does Ceo Incentive Pay Improve Bank Performance? A Quantile Regression Analysis Of U.S. Commercial Banks

Author

Listed:
  • MIN-LEE CHAN

    (Department of Finance, Providence University, Taichung, Taiwan, R.O.C.)

  • CHO-MIN LIN

    (Department of Finance, Providence University, Taichung, Taiwan, R.O.C.)

  • HSIN-YU LIANG

    (Department of International Trade, Feng-Chia University, Taichung, Taiwan, R.O.C.)

  • MING-HUA CHEN

    (Department of Information Management, Ling Tung University, Taichung, Taiwan, R.O.C.)

Abstract

The U.S. subprime crisis in 2008 have raised concerns about bank performance and the incentive pay of CEOs. Whether the CEO's incentive compensation improves bank performance deserves further investigation. This research studies the improvement in bank performance by examining the CEO incentive pay of 68 U.S. commercial banks from 1993 to 2005 using quantile regression (QR) analysis. The empirical evidence indicates that the relationship between bank performance and incentive pay does vary based on bank performance levels. Our results confirm that CEO incentive compensation improves the performance of high-performing banks and, at the same time, the accrued risks need to be taken into consideration and controlled through the efficient monitoring of outside directors. For low-performing banks, we find that outside directors have a significantly positive effect on performance regardless of whether such performance is adjusted or not adjusted. We suggest that banks with various performance levels require different mechanisms to enhance their performance. A "stick" approach consisting of efficient monitoring by outside directors may ensure that low-performing banks improve their performance improvements, whereas a "carrot" approach (i.e. CEO incentive pay) is appropriate for high-performing banks under risk controls and could also be accomplished through monitoring by outside directors.

Suggested Citation

  • Min-Lee Chan & Cho-Min Lin & Hsin-Yu Liang & Ming-Hua Chen, 2014. "Does Ceo Incentive Pay Improve Bank Performance? A Quantile Regression Analysis Of U.S. Commercial Banks," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-28.
  • Handle: RePEc:wsi:afexxx:v:09:y:2014:i:02:n:s2010495214400053
    DOI: 10.1142/S2010495214400053
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    References listed on IDEAS

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    1. Robert DeYoung & Emma Y. Peng & Meng Yan, 2010. "Executive compensation and business policy choices at U.S. commercial banks," Research Working Paper RWP 10-02, Federal Reserve Bank of Kansas City.
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    Cited by:

    1. Denise Rousseau & Byeong Jo Kim & Ryan Splenda & Sarah Young & Jangbum Lee & Donna Beck, 2023. "Does chief executive compensation predict financial performance or inaccurate financial reporting in listed companies: A systematic review," Campbell Systematic Reviews, John Wiley & Sons, vol. 19(4), December.

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    More about this item

    Keywords

    Bank performance; CEO incentive pay; outside directors; quantile regression; G30; G34; J33;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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