Behavior Effects Of Executive Compensation Incentive In Commercial Bank

Because of the financial crisis of South America, the worldwide bankrupts and thus initiated financial storm since 1990s, the various circles of society pay more and more attend on bank governance. Scholars begin to study bank governance from the specialty of bank. Under the particular background of banks, the principal—agent relationship becomes much more complex. The regulation of supervision institution on banks makes banks not only pursuit the profit maximization of shareholders, but also consider the benefit of the concerned interests such as the depositors in order to finish the given task from supervision institution and control bank risk and maintain bank safety and its robust management.Mainly based on the principal—agent theory, this paper considers the specialty of bank in order to study the executive compensation incentive mechanisms and its behavioral effects. The principal—agent relationship of general enterprises mainly involves the shareholders, the board of directors and the executives. Because of the specialty of bank, such as high liability, high risk and opaque, supervision institution has given banks strict regulation. The principal—agent relationship of banks becomes more complex due to the information asymmetry between various interests. The exits of supervision institution, depositors and lenders makes banks not only pursuit shareholders' interests and bank profits, but also consider the benefit of the concerned interests such as the depositors and maintain bank safety and its robust management. Thus, the arrangement of executive compensation incentives must be under the premise of controlling the bank risks and pursuit shareholders' interests and bank profits. And the compensation incentives makes executives preferred to take those behaviors controlling bank risk, not only to pursuit the profit maximization of shareholders which the paper call the behavior effects of executive compensation incentive. In other words, due to the bank executive compensation incentive, the executive reduces the risk taking behavior and thus reducing the bank risks. The regulation of supervision institution on banks is benefit to strengthen the behavior effects of executive compensation incentive.First of all, the paper analyzes executive compensation incentive mechanism of commercial bank and its behavior effects from theoretical and historical aspects. Then, based on the verification of presumption and hypothesis, the paper makes an empirical test on the behavior effects of medium-and-small commercial banks executive compensation incentive in Shandong Province and the influence of regulation on it.Combined with the theories on company corporate governance and bank governance, the paper contains five chapters in all.ChapterⅠis the introduction, containing background and significance of selecting project, research design, research structure and the innovation.ChapterⅡsummarizes the exiting domestic and foreign literatures in relational area.ChapterⅢis the theoretical foundation. Mainly based on the principal—agent theory, this chapter considers the specialty of bank in order to study the executive compensation incentive mechanism and its behavioral effects.ChapterⅣmakes an empirical test on the behavior effects of medium-and-small commercial banks executive compensation incentive in Shandong Province based on the foundation of the verification of presumption and hypothesis.ChapterⅤprovides the conclusions and corresponding proposals. Theoretical research discusses the behavioral effects of executive compensation incentive in a company and in a bank. As for a company, the purpose of executive compensation incentive is to coordinate the interests between executives and shareholders in order to reduce the agent cost. Because of the compensation incentive, risk-aversion executives inclined to choose those riskier projects which maximize the interests of shareholders. But for banks, due to the specialties of bank, such as high risk, high liability and regulation, behavioral effects of bank executive compensation incentive has its own specialty. If bank risk exceeds the point of risk which is setted by supervision institution, bank executives are possible to be punished. Thus, under the pressure of regulation, when the compensation is very high, bank executives will choose those behaviors reducing bank risk in order to protect their compensation and avoid to be punished.Based on the sample of 123 medium-small banks in Shandong Province, the empirical research makes statistics analysis and regression analysis on the behavioral effects of bank executive compensation incentive and the influence of regulation on it. The results shows that, own to the incentive of compensation, bank executives inclined to choose behaviors reducing bank risk; regulation reinforce the behavioral effects of bank executive compensation incentive.Based on the theoretical research and empirical test, the paper holds that the purpose of executive compensation incentive in commercial bank is to pursuit the profit maximization of shareholders in the frame of controlling bank risk. Own to the incentive of compensation, bank executives inclined to choose behaviors reducing bank risk and regulation restricts the excessively high risk behaviors of executives.