This study examines the compensation strategies of commercial bank holding companies (BHCs)

What is it about?

This study shows a stronger link between growth options and CEO compensation in the 1990s than observed in earlier studies and that pay-for-performance sensitivities are substantially larger for BHCs that have entered the underwriting (investment banking) business. We also find that BHC leverage and variability in returns have positive effects on CEO incentive pay. Finally, we find some evidence supporting the hypothesis that pay-for-performance sensitivities decline generally at BHCs as return variability increases, as agency theory predicts.

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Why is it important?

This study provides evidence that the compensation structure for CEOs in BHCs that have underwriting (investment banking) business become more similar with the compensation structure for CEOs in the investment banks. This evidence raises a concern regarding the change in CEO compensation structure for BHCs with underwriting business that tend to induce risk taking.