Relative performance evaluation in CEO pay contracts: evidence from the commercial banking industry
Article Abstract:
Keywords: Accounting research, Performance-related pay, Chief executives, Risk, Banking, USA This paper examines the use of Relative Performance Evaluation in bank CEO pay contracts between 1976-1988. Relating CEO pay to raw firm performance creates compensation risk over that of fixed salary contracts. By evaluating firm performance relative to peer performance using Relative Performance Evaluation, (RPE), CEO compensation risk can be reduced. We find evidence that bank CEO compensation is adjusted for narrowly defined industry performance measures but not for broader market performance measures. This result is inconsistent with the previous literature that documents broad market-RPE but finds no significant relation between executive pay and industry-RPE. Consistent with the RPE hypothesis we find the use of RPE increased in the early 1980s as banks became less regulated and pay-performance relations increased. We find no evidence of the use of RPE prior to deregulation when we document no significant relation between CEO pay and bank performance. These results are consistent with the use of RPE to reduce compensation risk associated with higher pay-performance relations.
Publication Name: Managerial Finance
Subject: Business
ISSN: 0307-4358
Year: 2000
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Is Community Reinvestment Act (CRA) lending profitable?: evidence from rating revisions
Article Abstract:
Keywords: Accounting research, Banking, Legislation, Loans, Profitability, USA Is Community Reinvestment Act (CRA) lending profitable? This seemingly simple question has generated considerable debate, but few answers. Proponents of the legislation point toward anecdotal success stories, such as those at Devon Bank, United Bank, and the more widely publicized Delaware Valley Mortgage Plan, to argue that CRA regulations should enhance (or at least not diminish) the profitability of lending institutions.(1) They further suggest that reaching out to serve the special needs of the local community enhances bank profitability along two frontiers. First, previously under-served market niches should provide economic profits in the short-run to those banks who enter and exploit existing opportunities. Second, undertaking CRA related activities will enhance the reputation of the institution within the community, thus generating loyalty among current patrons, and facilitating the acquisition of additional customers in the future.
Publication Name: Managerial Finance
Subject: Business
ISSN: 0307-4358
Year: 2000
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Incentive Structure of CEO Stock Option Pay and Stock Ownership: The Moderating Effects of Firm Risk
Article Abstract:
Keywords: Incentives, Stock Ownership, Shareholder Wealth, Performance This paper investigates the incentive effects of CEO stock ownership compared to those of stock option pay. It is argued that although both reward executives for increasing shareholder wealth, options fail to penalize executives when stock prices drop after the date of option grant. Moreover, due to these risk asymmetries, effects of these two forms of financial incentives likely diverge at high levels of firm risk. These hypotheses are tested with a sample of 250 large firms studied during the 1990s. Results indicate that at high levels firm risk stock ownership had positive effects on firm performance but stock option pay had negative effects.
Publication Name: Managerial Finance
Subject: Business
ISSN: 0307-4358
Year: 2000
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