Empirical Analysis On The Relationship Between Managerial Compensation And Bank Stability For Commercial Banks In China

Managerial compensation is the reword for devotion and contrubution, while therelationship between the compensation and bank performance is asymmetric. Highlevel executive compensation positively relates to bank performance, but also raisethe probability of bank failure. Several studies have examined the associationbetween the managerial compesation and the bank stability for banking industry.There are two kinds of theoretical consideration, moral hazard theory and agencytheroy. Due to nonexistance of deposite insurance and higher equity ratio ofgovernment, moral hazard theory is not appropriate to explain the empiricalassesment result for the banking industry in China. On the other hand, it is generallyaccepted that the seperation of ownership and control always leads to agencyproblems.Agency theroy predicts the bad effects of managerial compensation areassociated with agency cost incured by pricipal-agent problem, which means goals ofmanager and owner are in conflict. This is the reson why after the financial crisismany contries had established the regulations for bankers’pay. In2009, FinanceMinisty of China also released some guidelines regulating managirial compensationfor the financial state owned and state holding enterprises. But we should knowregulated industries easily lose their international competiveness by attracting CEOcandidates with lower education, even though it is contributes to the trend of worldfinancial market reform.Therefore, Based on agency theroy, we conduct emperical assesment for therelationship bewteen managirial compenstion and bank stablilty. We find that highermanagirial compensation is associated with a decrease in bank stability, but not with realestate industry loan ratio and construcion industry loan ratio. We suggest thatcommercial banks of china through strenthening say-on-pay, ensuring independenceof the remuneration committee and introducing the Restricted stocks, give full play tothe role of insentive mechanism for corporate governance and risk management.These reforms would be the key for steady and sustainable development ofcommnercial bank in china.