The Relationship Between Bank Risk And CEO Compensation Structure

2008 financial crisis hit the global economy severely,many experts criticized that unreasonable compensation system in financial institutions,particularly banks,encouraged bankers' risk taking behaviors and increased the overall level of risk in the financial sector,which finally led to the crisis.In this context,many countries started financial regulatory reform actively or passively,and the reform of executives' compensation plan has become an important part of it.Traditional researches in executive compensation mainly focus on absolute amounts and ignored the relationship between compensation structure and bank risk,resulting out-sized risk and sky-high paychecks in banks.This paper takes into account historical researches and related theories,assuming that the different types of remuneration and its proportion will have different incentive effects on executives,thus affecting the level of bank risk.On one hand,banks have to take a certain level of risk exposures to profit;on the other hand,too much risk can lead to liquidation and bankruptcy.Therefore,the shareholders have to use a variety of incentive methods to maintain the risk in a healthy range.So pay structure has a more significant impact on bank risk than the total amount of remuneration.On this basis,we propose the following four hypotheses:(1)there is no significant relationship between the total amount of CEO's pay and bank risk;(2)there is a negative correlation between the proportion of bonus and bank risk;(3)there is a positive correlation between the proportion of equity compensation and bank risk;(4)there is a negative correlation between the proportion of inside debt compensation and bank risk.In this paper,we use unbalanced panel data of global listed banks from 2007 to 2014 to test the relationship between CEO compensation structure and bank risk.We set tier 1 capital ratio,leverage ratio,non-performing loan ratio,ROA volatility,unsystematic risk and volatility of stock price as the measure of bank risk,add the per capita GDP,total assets,ROA,the proportion of non-interest income,PB and two dummies as control variables,establish four models according to compensation structure and draw the following conclusions:(1)total remuneration has an unstable effect on bank risk;(2)there is a positive correlation between the proportion of fixed cash salary and overall risk;(3)there is a negative correlation between the proportion of bonus and short-term risk;(4)there is a negative correlation between the proportion of equity compensation and overall risk;(5)there is a weak negative correlation between the proportion of inside debt compensation and bank risk.These results indicate that an effective executive incentive system needs to consider the total amount,the structure and the standards of performance measurement as whole.Therefore,Chinese executive compensation reform in financial sector need to improve information transparency,enhance the degree of marketization,and build a diversified incentive system.