Executive Compensation and Crash Risk in the Banking Sector.

• In Event: Monitoring, Executive Compensation, and CEO Turnover

Abstract

This paper compares the relation between executive compensation and bank crash risk in different periods. Specifically, it tests whether this relation has changed after the recent financial crisis when banks are required by regulators to improve their incentive compensation practices. Starting from mid-2010, US regulators formally require banks to balance risk and reward in their incentive compensation arrangements to avoid inappropriate risk-taking. The results show that (1) bank executives’ compensation is positively associated with crash risk in the pre-crisis period; (2) this association disappears after the launch of aforementioned regulations; and (3) these findings are concentrated in larger banks, and are mostly driven by bonus rather than equity compensation. The findings help us to evaluate the compatibility between bank executive compensation and effective risk control.

Author

• Tingting Ye, Boston University