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Banks Are Special: Are Bank CEOs Alike?

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Bank CEOs

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Abstract

What are the distinguishing characteristics of the CEO labour market in the financial sector? How has this market evolved, particularly after the 2008 financial crisis and the subsequent regulation of CEO and bank manager pay structures? In this chapter, we discuss answers to these questions, highlighting similarities and differences between the financial and nonfinancial industries. We identify the causes and mechanisms of the strikingly high compensation levels that have been observed since the mid-1980s, focusing on topics related to the peculiarities of compensation for bank CEOs. As banks are considered special firms in an economic system, we argue that banking CEOs are alike. We then discuss the impacts of regulatory mechanisms on CEO pay schemes and the agency problems that they can cause. Conflicts between CEOs and shareholders and debtholders arise from distorted incentives embedded into CEO compensation structures, which were particularly evident in the lead-up to the 2008 financial crisis. We review the main regulatory interventions implemented in the US and EU after the financial crisis. We conclude this chapter with a description of the interconnected factors that may affect bank executive incentives.

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Notes

  1. 1.

    The sample includes Australia, USA, Spain, Netherland, Norway, Denmark, Germany, Canada, Finland, Italy, Austria, Ireland, Sweden, South Korea, Portugal, Luxembourg, Czech Republic, Hungary, UK, Japan, France, Belgium and Sweden.

  2. 2.

    Bolton et al. (2016) studied models in which activities that are more opaque are related to higher informational rent extraction.

  3. 3.

    Evidence by Hasan and Song (2012) shows that ownership structures vary across banks. While more than 90% of banks in the US are widely held, in other countries, more than 50% of banks have controlling shareholders with more than 10% shares, which is consistent with the findings based on a large bank sample provided by Caprio et al. (2007).

  4. 4.

    Certain economic mechanisms may limit the extent of agency costs in debt markets. Beside charging a higher borrowing rate to compensate for any future loss (which it increases firm’s cost of capital), bond and loan contracts typically rely on positive and negative covenants to directly or indirectly control managerial actions (Smith and Warner 1979). Furthermore, reputation—both from repeated interactions with debt markets (Diamond 1989) and career concerns of managers (Fama 1980)—discourages managers by engaging in asset substitution and risk-shifting games.

  5. 5.

    For a detailed history of banking compensation regulation see, for instance, Cadman et al. (2012) and Murphy (2013).

  6. 6.

    See Baker and Wurgler (2013) for a survey of behavioral corporate finance issues and their implications for investment and financing patterns.

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  1. Faculty of Economics and Management, Free University of Bozen-Bolzano, Bolzano, Italy

    Claudia Curi & Maurizio Murgia

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  1. Claudia Curi
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  2. Maurizio Murgia
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Curi, C., Murgia, M. (2018). Banks Are Special: Are Bank CEOs Alike?. In: Bank CEOs. SpringerBriefs in Finance. Springer, Cham. https://doi.org/10.1007/978-3-319-90866-3_2

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