Incentive Features in CEO Compensation in the Banking Industry

[...]In this paper, we study the strength of incentive featuresin banks’ top-management compensation contracts. Weexamine the properties of bank-management compensationstructures, including pay-performance sensitivity, using datafrom 1992 to 2000. Based on existing theory, we hypothesizethat the pay-performance sensitivity of firms is decreasing indebt ratios and firm size; it should also be lower for regulatedfirms. We test these relationships for banks, manufacturingfirms, and regulated utilities. Banks are regulated, highlyleveraged, and, in our sample, larger than manufacturingfirms. The hypothesized relationship implies that banksshould have lower pay-performance sensitivity thanmanufacturing firms. The empirical evidence is consistentwith these hypotheses.[...]