CEO compensation and bank risk Is compensation in banking structured to promote risk taking?

  • Houston J
  • James C
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Abstract

This paper examines whether executive compensation in banking is structured to promote risk taking. We find that, on average, bank CEOs receive less cash compensation, are less likely to participate in a stock option plan, hold fewer stock options, and receive a smaller percentage of their total compensation in the form of options and stock than do CEOs in other industries. Cross-sectional differences in the structure of compensation contracts within banking are also examined. We find a positive and significant relation between the importance of equity-based incentives and the value of the bank's charter. This result is inconsistent with the hypothesis that compensation policies promote risk taking in banking. © 1995.

Author-supplied keywords

  • Compensation
  • Financial institutions
  • Government policy

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