Research On The Impact Of Executive Compensation Deferral Policy On Bank Risk-Taking

The root cause of the 2008 financial crisis has been leading people to trace and consider,and some scholars have suggested that compensation incentives with convex incentive characteristics are the trigger to induce executives to carry out risky behaviors,increase banks’ risk-taking,cause bank failures and eventually lead to financial turmoil.Therefore,the Financial Stability Board(FSB),the European Parliament,and the U.S.Parliament have introduced relevant bills to align the bank executive compensation management system with bank risk-taking,and vigorously implement internal debt incentives such as salary deferral,salary clawback,and pension plans,in an attempt to reduce executives’ risk appetite to a manageable level.2010,China’s Banking Regulatory Commission also promulgated the "Supervision of Sound Compensation of Commercial Banks In 2010,the CBRC also promulgated the"Guidelines on Sound Compensation Supervision of Commercial Banks",which imposed corresponding constraints on the payout of bank executives,including matching the medium and long-term risks of banks with the performance appraisal of executives through the means of deferred payout,forcing executives to reduce the bank’s high-risk decision-making behavior under the awareness of risk concern.In recent years,with the turbulent international situation and the needs of national economic development,financial risk prevention has become policy-oriented,and financial security has been placed in the forefront of national security,of which the most important is the prevention of risk in banking financial institutions,so what is the current status of implementation of the Regulatory Guidelines that have been in place for more than a decade? Has it effectively reduced the level of risk-taking of banks? Are there specific impact pathways? In view of this,this paper empirically analyzes the impact of executive compensation deferral policy on banks’ risk-taking and the ways of impact,taking 111 commercial banks in China as the research object,and proposes targeted policies and suggestions based on the research findings.This paper is divided into five chapters.The first chapter is the introduction,which firstly elaborates the study context and significance of this paper;secondly,it reviews the literature from four aspects: traditional executive compensation incentive,executive debt incentive,bank diversification decision and bank risk-taking;then it introduces the research ideas and methods of this paper;finally,it points out the innovation and deficiencies of this paper.The second section is a theoretical and practical analysis of the impact of executive compensation deferral policy on banks’ risk-taking.This section first defines and summarizes the relevant concepts,then discusses the basic theories such as human capital theory,principal-agent theory and compensation incentive theory,then clarifies the mechanism of the impact of executive compensation deferral policy on banks’ risk-taking on the basis of their theories and practices,and finally introduces the current status of the implementation of executive compensation deferral policy in commercial banks.The third chapter is the design of the empirical study on the impact of executive compensation deferral policy on banks’ risk-taking.This section first proposes two research hypotheses based on the theoretical analysis in the previous section,then explains the data sources and sample situation,and explains the selection criteria of relevant variables,and finally introduces the multi-temporal double difference model and the mediating effect model in this paper.The fourth section is the analysis of the empirical results of the impact of executive compensation deferral policy on bank risk-taking.Using the unbalanced panel data of 111 banks from 2007 to 2019,this paper first conducts a multi-temporal double difference regression to determine the positive and negative significance of executive compensation deferral policy on bank risk-taking,and then uses the mediating effect model to explore whether the diversification decision assumes a mediating role in its impact mechanism.The intermediation indicators are further subdivided into the proportion of fee and commission income,the proportion of investment income and the proportion of other income to examine which part of the diversification income of the bank bears the intermediation effect.Finally,the sample banks are classified according to type,whether they are listed or not,and size,and the heterogeneity of the situation is empirically analyzed in terms of the variability in the implementation of executive compensation deferral policies among different categories of banks,and the intermediation effect analysis is then carried out on the basis of the categories of banks in which they have a significant effect.Chapter 5 is the conclusion and policy recommendations,which summarizes the main findings of this paper and proposes relevant policies and suggestions for both supervisory administrations and individual banks based on the results of empirical analysis.Based on the previous theoretical and empirical studies,this paper concludes that the executive compensation deferral policy significantly affects individual bank risk and reduces bank risk-taking,and that bank diversification decisions play a part in the mediating effect.Further,by subdividing the diversification indicators,it can be concluded that the main mediating effects of diversification income are the fee and commission income and investment income components.Again,in terms of bank heterogeneity,joint-stock banks,city banks,non-listed banks,larger banks,and smaller banks all show that the level of bank risk-taking decreases with the implementation of the executive compensation deferral policy.However,in the subsequent results of the mediating effect under heterogeneity,the mediating effect of diversification is only present in the sample of small and medium-sized,non-listed,and city banks.Combining the empirical results,this paper puts forward the policy suggestions: on the part of supervisory,they should strengthen the supervision of executive compensation deferral policy,set dynamic executive compensation assessment standards,and improve the incentive mechanism of executive compensation in the industry.For banks,they should optimize the executive compensation deferral system,introduce the pension incentive system,establish a diverse executive compensation incentive system,and finally,they should rationalize the diversification of banks.The innovations and contributions of this paper are:(1)The existing literature uses traditional double difference,but since the executive compensation deferral policy is not implemented in the same year in China’s commercial banks,this paper adopts a multi-temporal double difference model as the benchmark model for empirical research.(2)In terms of mediating variables,this paper adopts the mediating variable of diversification for the first time to discuss the transmission mechanism of executive compensation deferral policy on banks’ risk-taking level from the new perspective of banks’ business strategies.(3)In terms of heterogeneity,this paper,based on the main research results,carries out heterogeneity test from three perspectives: bank category,whether the bank is listed or not,and bank size,so as to broaden the depth and breadth of this study.The weaknesses of this paper are that only one channel of influence,diversification,is explored,and only three components of non-interest income,namely,fees and commissions,investment income and other business income,are considered in the measurement of diversification indicators as a proportion of total income.