An Empirical Study On The Relationship Between Executive Compensation And Bank Risk In China’s Commercial Banks

In 2008,the financial crisis hit the global economy,meanwhile the problem of executives gaining "extremely high pay" in financial institutions was pushed to the cusp.After the hot,countries began to reflect on the issue of financial institutions executive’s pay,followed by the introduction of relevant policies and measures to improve the executive compensation mechanism.In 2009,China introduced the draft of the remuneration management approach,and in 2015,the formal implementation the "limit salary" policy was formally implemented,then the state-owned bank executives generally paid a significant salary reduction,but joint-stock banks and commercial banks affected by the relatively small.In addition,the banking industry in recent years encountered bottlenecks in development with profit margins declining and risk indicators generally rising.Bank institutions are the core institutions of China’s economy and society.Once the banking industry is in crisis,the whole economic environment will suffer,so the risk control of the banking industry is particularly important.So,in China,the banking industry executive compensation mechanism is linked with the level of bank risk or not,and if the level of bank risk fluctuations on executive compensation,it is worth our in-depth study.Based on the principal-agent theory,management short-sight theory and expectation theory,this paper argues that when the bank’s risk-taking level rises,in order to restore the reasonable risk level of the bank,the shareholders will punish the short-sighted risk-taking behavior by reducing the executive compensation.The first assumption is that executive compensation is negatively related to bank risk.Considering the differences in the different ways of risk management in different banks,this paper argues that there may be differences among the relationships of the banks’ executive pay and the risk indicators in the three kinds of banks(hypothesis 2).When the level of bank risk continues to rise,if the executive pay continued to significantly lower,executives will lose the enthusiasm of the work,and even will lead to departure upsurge,so as the level of bank risk rise,the rate of decline in executive pay will slow down.Based on the above analysis,this paper puts forward the third assumption that executive compensation is positively U-type related to bank risk.Based on the data of 60 commercial banks from 2006 to 2015,this paper divides the sample into three sub-samples of state-owned banks,joint-stock banks and commercial banks,and take non-performing loan ratio,capital adequacy ratio,provision coverage ratio,liquidity ratio and deposit-loan ratio as the proxy variables of bank risk,and take the asset size,bank performance,board size and independent directors ratio and time factor as control variables,and make empirical analysis of executive compensation and bank risk,and get the following results:First,the executive compensation of state-owned banks has U-type relationship with non-performing loan rate and capital adequacy ratio but has no relationship with the other three indicators;Second,joint-stock banks’executive compensation and non-performing loan rate has only linear negative correlation without U-type relationship,and there are no correlations with other indicators;Third,in city commercial banks,there is a significant negative correlation between the executive compensation and the deposit-loan ratio,but there is no U-type relationship,and the relationship with the NPL ratio is inverted U-type relationship,which may be because the city commercial development time is short,the current non-performing loan ratio relative Lower,in the controllable risk range,these banks pay more attention to the growth of profits,so increase the incentive to encourage executives to higher risk behavior,but when the non-performing loan rate rose to a certain extent,and began to pay the appropriate reduction Tube risk behavior,so as to achieve the purpose of risk control.Overall,the banking industry at this stage has initially established a risk constraint mechanism for executive compensation,but it is relatively simple and lowly sensitive.In this regard,this paper from the respects as the establishment of risk-adjusted compensation mechanism,the reinforcement of board governance and the strengthening of supervision propose relevant policy recommendations.